<PAGE> 1
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
( ) TRANSACTION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transaction period from ___________________ to ___________________
For Quarter Ended ___________________ Commission File Number 0-27706
AIRSTAR TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
Nevada 33-0664567
(State or other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
</TABLE>
1111 North Palm Canyon Drive, Suite E, Palm Springs, CA 92262
- -------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (760) 778-7834
-----------------
Formally XECOM Corp. 69-730 Highway 111, Suite 101, Rancho Mirage, CA 92270
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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 May 15, 1998, was 16,199,344 shares of common stock; 1,536,000 Series B
Preferred Shares; 605,000 Series C Preferred Shares outstanding and 16 Series D
Preferred Shares.
<PAGE> 2
FORM 10-QSB REPORT INDEX
<TABLE>
<CAPTION>
Form 10-QSB and Item No. Page
<S> <C> <C>
PART I FINANCIAL INFORMATION(1)
ITEM 1. Financial Statements
Consolidated Balance Sheet as of March 31, 1998
(Unaudited) ......................................................... 1
Consolidated Statements of Operations for the three months
ended March 31, 1998 and 1997 (Unaudited) ........................... 2
Consolidated Statement of Stockholders' Equity for the three months
ended March 31, 1998 (Unaudited) .................................... 3
Consolidated Statements of Cash Flows for the three months
ended March 31, 1998 and 1997 (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 5. Other Information ................................................... 15
</TABLE>
PART I -- FINANCIAL INFORMATION
- ---------------
(1) The accompanying financial statements are not covered by an independent
Certified Public Accountants Report.
<PAGE> 3
Item 1. FINANCIAL STATEMENTS
AIRSTAR TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AS OF March 31, 1998
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash $ 48,449
Restricted Cash (Note B) 5,690,891
Accounts receivable 989,086
Other receivables 1,136,157
------------
TOTAL CURRENT ASSETS 7,864,583
PROPERTY AND EQUIPMENT, net (Note C) 25,817,217
DEFERRED FINANCING COSTS (Note A) 1,516,487
OTHER ASSETS 111,826
INVESTMENT 20,013
------------
$35,330,126
============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 334,051
Accrued liabilities 1,259,383
Related party debt -- current portion (Note D) 271,000
Capital lease obligations -- current portion (Note E) 660,912
------------
TOTAL CURRENT LIABILITIES 2,525,346
CONTINGENT LIABILITY (Note E) 1,907,045
CAPITAL LEASE OBLIGATIONS, net of current portion (Note E) 42,235,260
------------
TOTAL LIABILITIES 46,667,651
COMMITMENTS AND CONTINGENCIES (Note E) --
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock, $0.0001 par value, 50,000,000 shares
authorized, 2,141,016 shares issued and outstanding March 31, 1998 214
Common stock $0.0001 par value, 100,000,000 shares
authorized, 16,199,344 shares issued and outstanding March 31, 1998 1,620
Additional paid in capital 4,530,109
Unrealized loss on investments, available-for-sale (180,000)
Retained deficit (15,689,468)
------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (11,337,525)
-------------
$ 35,330,126
============
</TABLE>
(See Notes to Consolidated Financial Statements)
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<PAGE> 4
AIRSTAR TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------
<S> <C> <C>
1998 1997
------------ -----------
NET SALES $1,914,337 $1,261,372
COST OF SALES 1,348,260 971,964
------------ -----------
Gross Profit 566,077 289,408
OPERATING EXPENSES
Selling, general and administrative expenses 845,415 413,160
Depreciation and amortization 719,397 499,428
------------ -----------
TOTAL OPERATING EXPENSES 1,564,812 912,588
------------ -----------
LOSS FROM OPERATIONS (998,735) (623,180)
OTHER INCOME (EXPENSES)
Minority interests in consolidated subsidiaries,
net income (Loss) (1,104)
Interest expense (889,894) (381,604)
Other income (expenses) 29,877 (442)
------------ -----------
TOTAL OTHER EXPENSES, NET (860,017) (383,150)
------------ -----------
LOSS BEFORE INCOME TAXES (1,858,752) (1,006,330)
Income taxes -- --
------------ -----------
NET LOSS $(1,858,752) $(1,006,330)
============ ===========
NET LOSS PER COMMON SHARE $ (.12) $ (.09)
============ ===========
AVERAGE COMMON SHARES OUTSTANDING 15,714,491 10,278,972
============ ===========
</TABLE>
(See Notes to Consolidated Financial Statements)
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<PAGE> 5
AIRSTAR TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Preferred Stock
------------ ---------------
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, 1997 15,609,658 $ 1,561 2,141,016 $ 214 $ 4,470,168 $ (180,000) $(13,830,716) $ (9,538,773)
Common Stock Issued 589,686 59 -- -- 59,941 -- -- 60,000
Net Loss -- -- -- -- -- -- (1,858,752) (1,858,752)
Balance, March 31, 1998 16,199,344 $ 1,620 2,141,016 $214 $ 4,530,109 $ (180,000) $(15,689,468) $(11,337,525)
</TABLE>
(See Notes to Consolidated Financial Statements)
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<PAGE> 6
AIRSTAR TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
MARCH 31
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(1,858,752) $(1,006,330)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 719,397 499,427
Compensation expense on issuance of Stock 60,000 47,242
Minority interest in subsidiary earnings -- 1,104
Changes in operating assets and liabilities:
Accounts receivable (355,733) (324,156)
Other receivables (1,019,354) (7,415)
Other assets 5,110 158,192
Accounts payable 2,231,543 218,983
Accrued liabilities 884,349 466,104
Customer advances -- 42,542
----------- -----------
NET CASH PROVIDED FROM OPERATING ACTIVITIES 666,560 95,693
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (346,292) --
Restricted Cash (3,267,426) --
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (3,613,718) --
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from capital lease financing 3,000,000 --
Proceeds from related party debt -- (3,000)
Payments under capital lease obligations (5,687) (47,490)
----------- -----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 2,994,313 (50,490)
----------- -----------
NET INCREASE (DECREASE) IN CASH 47,155 45,203
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,294 55,595
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 48,449 $ 100,798
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
-4-
<PAGE> 7
AIRSTAR TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosures of cash flow information for the nine months
ended March 31, 1998 and 1997, are summarized as follows:
1998 1997
------------ -----------
Cash paid for interest and income taxes
Interest $ $ 45,612
Income Taxes -- --
Noncash investing and financing activities:
Assets acquired by capital lease $ -- $11,473,544
-5-
<PAGE> 8
AIRSTAR TECHNOLOGIES, INC. AND SUBSIDIARY
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 Airstar
Technologies, Inc. , formerly Xecom Corp. (a Nevada corporation
incorporated on May 2, 1985), its wholly owned subsidiary, Select Switch
Systems, Inc. (Select), (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 single soldier 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
In 1997, the company signed a letter of agreement whereby First Continental
Capital Corporation received a 4% transaction fee of $1,619,392 for the
capital lease refinancing (Note E). The intangibles are being amortized
over the life of the lease of seven years using the straight line method.
Intangibles are recorded net of accumulated amortization of $102,905 as of
March 31, 1998.
-6-
<PAGE> 9
AIRSTAR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
Revenue derived from telephone services and usage fees is billed and
recorded monthly as the services are provided.
Net Loss Per Share
The net loss per share is computed by dividing the net loss by the weighted
average number of shares outstanding during the period. Preferred stock
Series A, B, and C were determined to be non-common stock equivalents.
Series D preferred stock is a common stock equivalent. The effect of
convertible securities is excluded from the computation because the effect
of the net loss per common share would be anti-dilutive.
Income Taxes
Income taxes are provided for using the liability method of accounting in
accordance with Statement of Financial Accounting Standards No. 109 (SFAS
109), "Accounting for Income Taxes." A deferred tax asset or liability is
recorded for all temporary differences between financial and tax reporting.
Deferred tax expense (benefit) results from the net change during the year
of deferred tax assets and liabilities.
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> 10
AIRSTAR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The periods presented are the three months ended March 31, 1998 and 1997,
respectively. Certain reclassifications have been made to the prior year
financial statements to conform to the current year presentation.
B. RESTRICTED CASH:
At March 31, 1998, cash in the amount $1,811,359 was held in an escrow
account for payment of sales and use tax liabilities in connection with
August 22, 1997 capital lease financing (See Note E). The Company may
petition state authorities and have such funds released from the escrow.
At March 31, 1998, cash in the amount of $541,077 was held in an escrow
account for payment of outstanding IRS tax liens and potential legal
liabilities from Federal Services Corporation (See Note E).
At March 31, 1998, cash in the amount of $3,338,455 was held in an escrow
account for payment of future infrastructure build out on certain
identified Army Bases (See Note E).
C. PROPERTY AND EQUIPMENT:
Property and equipment at March 31, 1998 is summarized as follows:
<TABLE>
<CAPTION>
1998
------------
<S> <C>
Machinery and equipment $ 27,220,364
Furniture and fixtures 155,589
Materials and supplies 31,291
------------
27,407,244
Less accumulated depreciation (1,590,027)
------------
Property and equipment, net $ 25,817,217
============
</TABLE>
Depreciation expense for the quarter ended March 31, 1998 and 1997 was
$675,295 and respectively $495,108.
-8-
<PAGE> 11
AIRSTAR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
D. RELATED PARTY-DEBT:
Notes payable at March 31, 1998 is summarized as follows:
<TABLE>
<CAPTION>
March 31, 1998
--------------
<S> <C>
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
--------
271,000
Less current portion 271,000
--------
$
========
</TABLE>
E. COMMITMENTS AND CONTINGENCIES:
Operating Leases
The Company leases office facilities and equipment under operating leases
which expire at various dates through the year 2002. The accompanying
statements of operations include expenses from operating leases of $35,529
and $37,331 for the three months ended March 31, 1998 and 1997,
respectively. Future minimum lease payments due under noncancelable
operating leases are as follows:
<TABLE>
<S> <C>
1998 $106,586
1999 144,402
2000 76,035
2001 7,668
2002 --
--------
$334,691
========
</TABLE>
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> 12
AIRSTAR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
COMMITMENTS AND CONTINGENCIES (CONTINUED)
Capital Leases
The following is an analysis of the book value of the leased assets
included in property and equipment as of March 31, 1998.
<TABLE>
<CAPTION>
1998
-----------
<S> <C>
Cost $27,209,618
Accumulated depreciation (1,444,852)
-----------
$25,764,766
===========
</TABLE>
On August 22, 1997, the Company entered into a sales-lease back
transaction, whereby, the Company sold substantially all telecommunication
equipment (34 units) held at military bases to First Continental Capital
Corporation (First Capital) for $29,077,234, and then entered into a
capital lease agreement with First Capital. In accordance with Financial
Accounting Standards No. 13 (SFAS No. 13), the profit or loss on the sale
is deferred in the cost of the equipment and amortized over the life of the
equipment. Terms of the agreement state that no payments are due for the
period from September 1, 1997 through June 1, 1998; from July 1, 1998
through August 1, 2004, seventy four (74) equal monthly payments of
$550,954 are due; with one final payment of $6,168,060 due on September 1,
2004. Payments include imputed interest at 10.25% per annum. The agreement
is secured by UCC-1 filings on all equipment and is guaranteed by Sprint
Communications Company, L.P. The agreement requires that $1,763,066 and
$534,205 of the proceeds be held in a restricted cash account for taxes and
potential legal liabilities. (Note B) Proceeds of the transaction were used
to pay off previous capital lease obligations and other accounts and loans
payable. On March 19, 1998, the terms of the lease were revised, whereby,
from July 1, 1998 through August, 2008, one hundred twenty-two (122) equal
monthly payments of $413,072 are due, with one final payment of $6,168,060
due on September 1, 2008. Payments include imputed interest at 10.25% per
annum. On March 19, 1998, the Company entered into another new financing
agreement with First Continental Capital Company (First Capital) for
$9,997,793. The Company used the additional funds to purchase new capital
leases and paid off monies owed to Sprint Communications Corporation, L.P.
Terms of the agreement state that no payments are due for the period April
1, 1998 through December 1, 1998; from January 1, 1999 through August 1,
2008 one hundred sixteen (116) equal monthly payments of $136,217 are due;
with one final payment of $1,999,559 due on September 1, 2008.
The future minimum lease payments under capitalized leases and the present
value of the net minimum lease payments are as follows:
<TABLE>
<S> <C>
1998 $ 2,494,174
1999 6,612,103
2000 6,591,457
2001 6,591,457
2002 6,591,457
Thereafter 45,673,721
-----------
Total Payments 74,554,369
Less amount representing interest 31,658,197
-----------
42,896,172
Less current portion of capital leases 660,912
-----------
$42,235,260
===========
</TABLE>
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<PAGE> 13
AIRSTAR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 $1,034,000 plus interest 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.
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. Additionally, the former shareholders are
asserting to rescind the Company's control and purchase of Select Switch
Systems, Inc. The claims are preliminary, however, management believes a
reasonable estimate of a loss, based on information currently available, is
$1,907,045. Included in contingencies in the consolidated balance sheet at
March 31, 1998, are liabilities of $1,907,045 associated with this action.
During 1996, an action was filed against the Company in Federal Court in
Michigan. In this action, the plaintiff was seeking damages in the sum of
$750,000 for breach of contract, and for costs of the suit. The complaint
alleged 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. In 1997, the suit was
settled for $125,000, payable in six installments through May 20, 1998. The
outstanding balance of $110,000 is included in accrued expenses on the
consolidated balance sheet.
During 1996, an action was filed against the Company in the U.S. District
Court of Texas. This action contends the Company is liable for certain
alleged unpaid promissory notes totaling approximately $519,000. 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 a 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 were
converted to equity. On April 13, 1998, a final judgment was awarded to the
plaintiff totaling $840,000. On April 21, 1998, the Company entered into a
Compromise Settlement Agreement ("Agreement") with the plaintiff to pay
$750,000 in full payment of the final judgment amount. Terms of the
Agreement are as follows: $540,000 was paid from the Company's current
escrow account on April 23, 1998, four monthly payments of $40,000 are
payable commencing June 8 through September 8, 1998 and two monthly
payments of $25,000 on October 8 and November 8, 1998. If the Company
defaults on any payments of the Agreement, then the original final
judgment of $840,000 becomes due and payable. Included in accrued expenses
in the consolidated balance sheet at March 31, 1998, is a liability of
$750,000.
During 1997, an action was filed against the Company for using the name
"Xecom Corp." while the rights to the name belong to another corporation.
Accordingly, on April 27, 1998, the United States District Court, North
District of California, under Civil Action No. C-97-21099-SW mandated
through a court order for the Company to operate under the name Airstar
Technologies, Inc. and filed a change of name with the Secretary of State
of Nevada. Additionally, a default judgment was issued against the Company
for improperly using the Xecom mark. The case is in the preliminary stages
and management believes the losses are remote. If the default judgment is
not set aside, the Company believes a reasonable estimate of the loss,
based on the information currently available, would exceed $1,000,000. The
Company does not expect any further contingencies to result from this
action.
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.
-11-
<PAGE> 14
AIRSTAR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the Company's financial condition as of March 31,
1998 and results of operations for the three months ended March 31, 1998 and
1997, 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 single soldier 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.
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 single soldier 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 35 of such military bases which are
comprised of approximately 70,000 residents.
-12-
<PAGE> 15
AIRSTAR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RESULTS OF OPERATION
For the three months ended March 31, 1998, the Company's net sales revenues
increased from $1,261,372 to $1,914,337 an increase of 55% for the same period
in 1997.
For the three months ended March 31, 1998, the Company's gross profit was
$566,077, or 30%, as compared to $289,408, or 23% in 1997. The Company
anticipates that the gross margin in 1998 will continue to increase as the
Company signs up subscribers and provides other enhanced services to the
servicemen, as well as reduce its operating cost of leasing trunk lines.
Selling, general and administrative expenses for 1998 amounted to $845,415, or
44% of net sales, as compared to $413,160, or 32% of net sales in 1997. The net
loss of $1,858,752 was predominantly the result of depreciation and amortization
expense of $719,397 and interest expense of $889,894 for a total of $1,609,291.
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 Direct Broadcast Satellite, high speed Internet and 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 $10 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 March 31, 1998, the Company's aggregate cash and cash equivalent totaled
$5,739,340. The Company financed its operations in 1997 primarily from credit
extended by First Continental Capital 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.
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 lease-back 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 million; (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 $2,297,271 for
payment of certain outstanding obligations and an estimated reserve for any
state sales tax on the sale that may arise, if any.
In March 1998, the Company completed a restructuring and expansion of the
aforementioned capital lease facility totaling $41 million. Under the terms of
the new leasing contract, repayments of the new combined lease has been
expanded from seven to ten years. Payments of the new portion of the financing,
which is being utilized primarily to expand switching, cabling, and wiring at
both new and existing military facilities will be deferred until January 1999.
By restructuring the existing $31 million leased facility from seven to ten
years, the Company was able to reduce amortization payments by approximately
$137,000 per month.
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 and revenue enhanced services 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.
-13-
<PAGE> 16
AIRSTAR TECHNOLOGIES, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
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> 17
AIRSTAR TECHNOLOGIES, INC. AND SUBSIDIARY
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGES IN SECURITIES
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. OTHER INFORMATION
The Company has not filed its Form 10KSB for the year ended 12/31/97 & 12/31/96.
During 1997, an action was filed against the Company for using the name "Xecom
Corp." while the rights to the name belong to another corporation. Accordingly,
on April 10, 1998, the Board of Directors authorized the Company to operate
under the name Airstar Technologies, Inc. and to file a change of name with the
Secretary of State of Nevada. The Company's new trading symbol was changed to
ASTG.
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
Exhibit 27. Financial Data Schedule
-15-
<PAGE> 18
AIRSTAR TECHNOLOGIES, INC. AND SUBSIDIARY
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.
AIRSTAR TECHNOLOGIES, INC.
By: /s/ JOSEPH C. VIGLIAROLO
---------------------------------
Joseph C. Vigliarolo
President
May 15, 1998
-16-
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