<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, 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)
Nevada 33-0664567
- ------------------------------------- ------------------------------------
(State or other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
1111 North Palm Canyon Drive, Suite E, Palm Springs, CA 92262
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (760)320-2782
------------------------
N/A
- -------------------------------------------------------------------------------
(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, 1998, was 21,850,021 shares of common stock; 1,536,000 Series B
Preferred Shares; 455,000 Series C Preferred Shares outstanding and 12 Series D
Preferred Shares.
<PAGE>
FORM 10-QSB REPORT INDEX
FORM 10-QSB AND ITEM NO.
PART I FINANCIAL INFORMATION(1)
<TABLE>
<S> <C> <C>
ITEM 1. Financial Statements
Consolidated Balance Sheet as of September 30, 1998
(Unaudited)...................................................... 1
Consolidated Statements of Operations for the three months and
nine months ended September 30, 1998 and 1997 (Unaudited)........ 2
Consolidated Statement of Stockholders' Equity for the nine
months ended September 30, 1998 (Unaudited)...................... 3
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1998 and 1997 (Unaudited) ................... 4 - 5
Notes to Consolidated Financial Statements (Unaudited)........... 6 - 12
ITEM 2. Managements' Discussion and Analysis of the Financial
Condition and Results of Operations ............................. 13 - 14
PART II OTHER INFORMATION
Item 1. Other Information.................................................. 15
</TABLE>
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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
AIRSTAR TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash $ 292,609
Restricted Cash (Note B) 189,669
Accounts receivable 802,860
Other receivables 391,917
------------
TOTAL CURRENT ASSETS 1,677,055
PROPERTY AND EQUIPMENT, net (Note C) 28,600,863
DEFERRED FINANCING COSTS (Note A) 1,443,696
OTHER ASSETS 78,266
INVESTMENT 20.013
------------
$31,819,893
------------
------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 886,134
Accrued liabilities 919,422
Related party debt -- current portion (Note D) 255,000
Capital lease obligations -- current portion (Note E) 1,964,324
------------
TOTAL CURRENT LIABILITIES 4,024,880
CONTINGENT LIABILITY (Note E) 1,769,605
Capital Lease Obligations Investor Current Portion (Note E) 41,627,758
------------
TOTAL LIABILITIES 47,422,243
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock, $0.0001 par value, 50,000,000
shares authorized, 1,991,012 shares issued
and outstanding September 30, 1998 199
Common stock $0.0001 par value, 100,000,000
shares authorized, 17,600,021 shares issued
and outstanding September 30, 1998 1,760
Additional paid in capital 4,529,984
Unrealized loss on investments, available-for-sale (180,000)
Retained deficit (19,954,293)
------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (15,602,350)
------------
$31,819,893
------------
------------
</TABLE>
(See Notes to Consolidated Financial Statements)
-1-
<PAGE>
AIRSTAR TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $2,019,133 $2,060,351 $4,962,263 $5,964,247
COST OF SALES 1,382,508 1,341,315 3,526,765 3,829,790
------------ ------------ ------------ ------------
Gross Profit 636,625 719,036 1,435,498 2,134,457
OPERATING EXPENSES
Selling, general and administrative expenses 1,277,498 1,027,234 2,120,508 2,716,233
Depreciation and amortization 386,244 684,845 1,601,138 2,084,869
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 1,663,742 1,712,079 3,721,646 4,801,102
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (1,027,117) (993,043) (2,286,148) (2,666,645)
OTHER INCOME (EXPENSES)
Minority interests in consolidated subsidiaries 8926 10,612
Interest expense (843,452) (1,125,618) (1,980,510) (3,090,836)
Other income (expenses) (576) (436,880) (18,495) (366,096)
------------ ------------ ------------ ------------
TOTAL OTHER EXPENSES, NET (835,102) (1,562,498) (1,988,393) (3,456,932)
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES (1,862,219) (2,555,541) (4,274,541) (6,123,577)
Income taxes --- --- --- ---
NET LOSS $(1,862,219) $(2,555,541) $(4,274,541) $(6,123,577)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
NET LOSS PER COMMON SHARE $(.12) $(.15) $(.35) $(.37)
------------ ------------ ------------ ------------
------------ ------------
AVERAGE COMMON SHARES OUTSTANDING 14,919,343 17,516,869 12,069,776 16,638,682
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
(See Notes to Consolidated Financial Statements)
-2-
<PAGE>
AIRSTAR TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Preferred Stock
- --------------------------------------------------------------------------------------------------------------------------------
Shares Amount Shares Amount Additional Unrealized Retained Total
$ $ Paid Loss on Deficit Shareholders
in Capital Investments Equity
Available- (Deficit)
For-Sale
- --------------------------------------------------------------------------------------------------------------------------------
<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
- --------------------------------------------------------------------------------------------------------------------------------
Preferred "C" Conversion 150,000 15 (150,000) (15) -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Preferred "D" Conversion 1,250,677 125 (4) -- (125) -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Net Loss -- -- -- -- -- -- (6,123,577) (6,123,577)
- --------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 17,600,021 $1,760 1,991,012 $199 $4,529,984 $(180,000) $(19,954,293) $(15,602,350)
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(See Notes to Consolidated Financial Statements)
-3-
<PAGE>
AIRSTAR TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS ENDED
SEPTEMBER 30
------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(6,123,577) $(4,274,541)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 2,084,869 1,601,136
Compensation expense on issuance of Stock 60,000 (36,636)
Minority interest in subsidiary earnings --- (10,612)
Loss on sale of contract (16,331)
Changes in operating assets and liabilities:
Accounts receivable (169,507) (637,405)
Other receivables (275,114) 20,321
Financing Costs (1,234,862)
Other assets 38,670 146,390
Accounts payable 2,783,624 614,516
Accrued liabilities 1,632,997 3,163,267
----------- -----------
NET CASH PROVIDED FROM OPERATING ACTIVITIES 31,962 (664,757)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (4,422,619) ---
Restricted Cash 2,233,796 ---
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (2,188,823) ---
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from capital lease financing 3,000,000 3,719,385
Payments on related party debt (3,000)
Payments under capital lease obligations (398,384) (123,951)
Payments on notes payable (153,440) (400,000)
----------- -----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 2,448,176 3,192,434
----------- -----------
NET INCREASE (DECREASE) IN CASH 291,315 2,527,677
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,294 55,595
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $292,609 $2,583,272
----------- -----------
----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements
-4-
<PAGE>
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
September 30, 1998 and 1997, are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash paid for interest and income taxes
Interest $ 906,759 $ 2,382,486
Income Taxes ---- ----
Noncash investing and financing activities:
Assets acquired by capital lease $ ---- $ 3,477,111
Payables included in equipment lease $6,613,261 $ 5,973,140
Refinance of capital lease debt ---- $27,120,914
Accrued interest deferred into capital lease $1,957,990 ----
Financing cost included in capital lease $ 384,530 ----
</TABLE>
-5-
<PAGE>
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
inter-company 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 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.
On October 13, 1998, Airstar Technologies filed a voluntary petition in
the U.S. Bankruptcy Court for the Central District of California for
protection and reorganization under Chapter 11 of the U.S. Bankruptcy
Code in Case No. RS98-30282MG. The Company's wholly-owned subsidiary,
Select Switch Systems, Inc., filed for Chapter 11 protection at the same
time, in the same court, in Case No. RS98-30293MG. The filings were
made to facilitate the restructuring of the Company's operations and
financing arrangements.
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 ten years using the straight line method.
Intangibles are recorded net of accumulated amortization of $175,696 as of
September 30, 1998.
REVENUE RECOGNITION
Revenue derived from telephone services and usage fees is billed and
recorded monthly as the services are provided.
-6-
<PAGE>
AIRSTAR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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>
AIRSTAR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The periods presented are the nine months ended September 30, 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 September 30, 1998, cash in the amount $3,173 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 September 30, 1998, cash in the amount of $186,496 was held in an escrow
account for payment of future infrastructure build-out on certain
identified Army Bases and payments in accordance with amendments to the
Sprint subcontract.
(See Note E).
C. PROPERTY AND EQUIPMENT:
Property and equipment at September 30, 1998 is summarized as follows:
<TABLE>
<CAPTION>
1998
------
<S> <C>
Machinery and equipment $31,269,460
Furniture and fixtures 162,133
Materials and supplies 51,978
------------
31,483,571
Less accumulated depreciation (2,882,708)
------------
Property and equipment, net $28,600,863
------------
------------
</TABLE>
Depreciation expenses for the periods ended September 30, 1998 and 1997 were
$1,967,976 and $1,573,479 respectively.
-8-
<PAGE>
AIRSTAR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
D. RELATED PARTY-DEBT:
Notes payable at September 30, 1998 is summarized as follows:
<TABLE>
<CAPTION>
September 30, 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
Less current portion $255,000
---------
$ 0
---------
---------
</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 $107,042
and $127,821 for the nine months ended September 30, 1998 and 1997,
respectively. Future minimum lease payments due under noncancelable
operating leases are as follows:
<TABLE>
<S> <C>
1998 $ 35,073
1999 144,402
2000 76,035
2001 7,668
2002 ---
--------
$263,178
--------
--------
</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>
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 September 30, 1998.
<TABLE>
<CAPTION>
1998
----
<S> <C>
Cost $31,269,460
Accumulated depreciation (2,812,393)
------------
$28,457,067
------------
------------
</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 $ 1,797,250
1999 6,610,700
2000 6,591,457
2001 6,591,457
2002 6,591,457
Thereafter 44,969,921
------------
Total Payments 73,152,242
Less amount representing interest 29,560,160
------------
43,592,082
Less current portion of capital leases 1,964,324
------------
$41,627,758
------------
------------
</TABLE>
-10-
<PAGE>
AIRSTAR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
COMMITMENTS AND CONTINGENCIES (CONTINUED)
During 1996, the Company filed a lawsuit in the U.S. District Court of
California against previous directors, shareholders, and officers of Select
S witch 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. On July 2, 1998, the plaintiffs in the Illinois case
received a judgement against the Company for $1,750,000. Included in
contingencies in the consolidated balance sheet at September 30, 1998, are
liabilities of $1,769,605 associated with this action. The Company plans to
take all actions neessary to mitigate these lawsuits.
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 has been paid in full.
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 ercorded 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 twop
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
judgmenet of $840,000 becomes due and payable. Included in accrued
expenses in the consolidated balance sheet at September 30, 1998, is a
liability of $90,000.
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.
On August 26, 1998, a lawsuit was filed by Topnet, Inc., Mario Lanza, Mark
Lawrence, Indian Wells Investment Company, Monte Anderson, Gary Stoller,
Greg Dhuyvetter and James Gleason, in the State of Nevada, asking the Court
to require the Company to hold a shareholders meeting.The Company has plans
to hold a shareholders meeting as soon as it meets the requirements of the
SEC for such an event.
-11-
<PAGE>
On August 27, 1998, a lawsuit was filed by the Company against Joseph
Lanza, Jayne Lanza, Mario Lanza, Indian Wells Investment Company and
several other entities believed to be owned or controlled by Joseph
Lanza. The case, entitled
AIRSTAR TECHNOLOGIES, INC. V. JOSEPH LANZA ET AL, filed in California
Superior Court (Riverside County) as Case No. INC008689, arose out of
actions of the defendants in connection with a consulting agreement between
Airstar Technologies and Indian Wells Investment Company, the sale of
SelecTel Corporation, overbilling and false billing by Indian wells
Investment Company, fraudulent concealment by Jospeh Lanza of his
background as it relates to the securities industry and fraudulent
non-disclosure of information to the Company which had a materially
adverse effect on the Company's business. The Company has sought and
obtained an injunction by the Court preventing the defendants from
transferring or trading any of their stock in Airstar, from voting their
shares in any way and from soliciting the proxies of other shareholders.
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.
F. SUBSEQUENT EVENTS
On October 13, 1998, Airstar Technologies filed a voluntary petition in
the U.S. Bankruptcy Court for the Central District of California for
protection and reorganization under Chapter 11 of the U.S. Bankruptcy
Code in Case No. RS98-30282MG. The Company's wholly-owned subsidiary,
Select Switch Systems, Inc., filed for Chapter 11 protection at the same
time in the same court in Case No. RS98-30293MG. The filings were made to
facilitate the restructuring of the Company's operations and financing
arrangements.
-12-
<PAGE>
.0AIRSTAR TECHNOLOGIES, INC. AND SUBSIDIARY
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, 1998 and results of operations for the nine months ended September 30, 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 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 was also awarded a five-year
contract to provide the aforementioned services to the Air Force Academy.
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.
RESULTS OF OPERATION
For the nine months ended September 30, 1998, the Company's net sales revenues
increased from $4,962,263 to $5,964,247 an increase of 20% for the same period
in 1997.
For the nine months ended September 30, 1998, the Company's gross profit was
$2,134,457, or 36%, as compared to $1,435,498, or 29% in 1997. The increase in
the margins is the result of reduced trunking costs.
Selling, general and administrative expenses for 1998 amounted to $2,716,233, or
45% of net sales, as compared to $2,120,508, or 43% of net sales in 1997. The
net loss of $6,123,577 was predominantly the result of depreciation and
amortization expense of $2,084869 and interest expense of $3,090,836 for a
total of $5,175,705. These expenses directly relate to the telecommunication
systems and equipment and related debt as they relate to the AAFES project.
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LIQUIDITY AND CAPITAL RESOURCES
Both the intended increase of the Company's Military Business and the entry
into the Direct Broadcast Satellite, cable TV and high speed Internet 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 6 to12 months, the cost for
such expansion will be approximately $10 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, 1998, the Company's aggregate cash and cash equivalent
totaled $482,277. 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
equipnment 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 moritorium 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
aforementioend capital lease facility totaling $41million. 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 defrerred until January 1999. By
restructuring the existing $31 million leased facility from seven to ten years,
the Company was able to reduce ammortization payments by approximately $137,000
per month, which is equal to the additional payments which begin in January
1999. The Company commenced payment on its lease obligations on July 1st, 1998.
After obtaining clearance from the applicable state authorities, confirming that
there was no sales tax liability owing, the Company utilized these escrow funds
to make its lease payments and to fund operations. The Company is experiencing
approximately $400,000 negative cash flow from operations on a monthly basis
going forward.
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.
On October 13, 1998, Airstar Technologies filed a voluntary petition in the U.S.
Bankruptcy Court for the Central District of California for protection and
reorganization under Chapter 11 of the U.S. Bankruptcy Code. The Company's
wholly-owned subsidiary, Select Switch Systems, Inc., filed for Chapter 11
protection at the same time. The filing was made to facilitate the restructuring
of the Company's operations and financing arrangements.
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.
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AIRSTAR TECHNOLOGIES, INC. AND SUBSIDIARY
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 26, 1998, a lawsuit was filed by Topnet, Inc., Mario Lanza, Mark
Lawrence, Indian Wells Investment Company, Monte Anderson, Gary Stoller, Greg
Dhuyvetter and James Gleason, in the State of Nevada, asking the Court to
require the Company to hold a shareholders meeting.The Company has plans to hold
a shareholders meeting as soon as it meets the requirements of the SEC for such
an event.
On August 27, 1998, a lawsuit was filed by the Company against Joseph Lanza,
Jayne Lanza, Mario Lanza, Indian Wells Investment Company and several other
entities believed to be owned or controlled by Joseph Lanza. The case,
entitled
AIRSTAR TECHNOLOGIES, INC. V. JOSEPH LANZA ET AL, filed in California Superior
Court (Riverside County) as Case No. INC008689, arose out of actions of the
defendants in connection with a consulting agreement between Airstar
Technologies and Indian Wells Investment Company, the sale of SelecTel
Corporation, overbilling and false billing by Indian wells Investment Company,
fraudulent concealment by Jospeh Lanza of his background as it relates to the
securities industry and fraudulent non-disclosure of information to the Company
which had a materially adverse effect on the Company's business.
The Company has sought and obtained an injunction by the Court preventing the
defendants from transferring or trading any of their stock in Airstar, from
voting their shares in any way and from soliciting the proxies of other
shareholders.
ITEM 2. CHANGES IN SECURITIES
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. OTHER INFORMATION
On July 2, 1998, the plaintiffs in the Illinois litigation received a judgement
against the Company for $1.75 million.
On October 13, 1998, Airstar Technologies filed a voluntary petition in the
U.S. Bankruptcy Court for the Central District of California for protection
and reorganization under Chapter 11 of the U.S. Bankruptcy Code in Case No.
RS98-30282MG. The Company's wholly-owned subsidiary, Select Switch Systems,
Inc., filed for Chapter 11 protection at the same time in the same court in
Case No. RS98-30293MG. The filings were made to facilitate the restructuring
of the Company's operations and financing arrangements.
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
Exhibit 27. Financial Data Schedule
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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: ___________________________
JOSEPH C. VIGLIAROLO
PRESIDENT
November 14, 1998
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