<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 June 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
------------------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (760)320-2782
Formerly Xecom Corp. 69-730 Highway 111, Suite 101, Rancho Mirage, CA 92270
---------------------------------------------------------------------------
(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 August 12, 1998, was 17,450,021 shares of common stock; 1,536,000 Series B
Preferred Shares; 605,000 Series C Preferred Shares outstanding and 12 Series D
Preferred Shares.
<PAGE> 2
FORM 10-QSB REPORT INDEX
Form 10-QSB and Item No.
PART I FINANCIAL INFORMATION(1)
<TABLE>
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheet as of June 30, 1998
(Unaudited) .......................................................................... 1
Consolidated Statements of Operations for the three months and six months
ended June 30, 1998 and 1997 (Unaudited).............................................. 2
Consolidated Statement of Stockholders' Equity for the six months
ended June 30, 1998 (Unaudited)........................................................ 3
Consolidated Statements of Cash Flows for the six months
ended June 30, 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 1. Other Information......................................................................... 15
</TABLE>
- --------
(1) The accompanying financial statements are not covered by an independent
Certified Public Accountants Report.
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AIRSTAR TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1998
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash $ 183,911
Restricted Cash (Note B) 2,444,077
Accounts receivable 830,883
Other receivables 401,916
------------
TOTAL CURRENT ASSETS 3,860,787
PROPERTY AND EQUIPMENT, net (Note C) 28,340,138
DEFERRED FINANCING COSTS (Note A) 1,480,091
OTHER ASSETS 113,225
INVESTMENT 20,013
------------
$ 33,814,254
============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 415,927
Accrued liabilities 679,106
Related party debt -- current portion (Note D) 271,000
Capital lease obligations -- current portion (Note E) 1,514,510
------------
TOTAL CURRENT LIABILITIES 2,880,543
CONTINGENT LIABILITY (Note E) 1,907,045
Capital Lease Obligations Investor Current Portion (Note E) 42,073,475
------------
TOTAL LIABILITIES 46,861,063
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock, $0.0001 par value, 50,000,000 shares
authorized, 2,141,012 shares issued and outstanding June 30, 1998 214
Common stock $0.0001 par value, 100,000,000 shares
authorized, 17,450,021 shares issued and outstanding June 30, 1998 1,745
Additional paid in capital 4,529,984
Unrealized loss on investments, available-for-sale (180,000)
Retained deficit (17,398,752)
------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (13,046,809)
------------
$ 33,814,254
============
</TABLE>
(See Notes to Consolidated Financial Statements)
-1-
<PAGE> 4
AIRSTAR TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------------ ------------------------------
1997 1998 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $ 1,681,758 $ 1,989,559 $ 2,943,130 $ 3,903,896
COST OF SALES 1,172,293 1,140,215 2,144,257 2,488,475
------------ ------------ ------------ ------------
Gross Profit 509,465 849,344 798,873 1,415,421
OPERATING EXPENSES
Selling, general and administrative expenses 429,850 843,584 843,010 1,688,999
Depreciation and amortization 715,466 680,627 1,214,894 1,400,024
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 1,145,316 1,524,211 2,057,904 3,089,023
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (635,851) (674,867) (1,259,031) (1,673,602)
OTHER INCOME (EXPENSES)
Minority interests in consolidated subsidiaries 2,790 -- 1,686 --
Interest expense (755,454) (1,075,324) (1,137,058) (1,965,218)
Other income (expenses) (17,477) 40,907 (17,919) 70,784
------------ ------------ ------------ ------------
TOTAL OTHER EXPENSES, NET (770,141) (1,034,417) (1,153,291) (1,894,434)
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES (1,405,992) (1,709,284) (2,412,322) (3,568,036)
Income taxes -- -- -- --
NET LOSS $ (1,405,992) $ (1,709,284) $ (2,412,322) $ (3,568,036)
============ ============ ============ ============
NET LOSS PER COMMON SHARE $ (.13) $ (.10) $ (.23) $ (.22)
------------ ============ ------------ ------------
AVERAGE COMMON SHARES OUTSTANDING 10,964,504 16,664,878 10,621,377 16,192,310
============ ============ ============ ------------
</TABLE>
(See Notes to Consolidated Financial Statements)
-2-
<PAGE> 5
AIRSTAR TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
- --------------------------------------------------------------------------------
Common Stock Preferred Stock
<TABLE>
<CAPTION>
Shares Amounts Shares Amounts
---------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Balance December 31, 1997 15,609,658 $ 1,561 2,141,016 $ 214
---------- ------------ --------- ------------
Common Stock Issued 589,686 59 -- --
---------- ------------ --------- ------------
Preferred "D" Conversion 1,250,677 125 (4) --
---------- ------------ --------- ------------
Net Loss -- -- -- --
---------- ------------ --------- ------------
Balance, June 30, 1998 17,450,021 $ 1,745 2,141,012 $ 214
---------- ------------ --------- ------------
</TABLE>
Common Stock Preferred Stock
<TABLE>
<CAPTION>
Unrealized Loss on Total
Investments Shareholders
Additional Paid Available- Retained Equity
in Capital For-Sale Deficit (Deficit)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance December 31, 1997 $ 4,470,168 $ (180,000) $(13,830,716) $ (9,538,773)
------------ ------------ ------------ ------------
Common Stock Issued 59,941 -- -- 60,000
------------ ------------ ------------ ------------
Preferred "D" Conversion (125) -- -- --
------------ ------------ ------------ ------------
Net Loss -- -- (3,568,036) (3,568,036)
------------ ------------ ------------ ------------
Balance, June 30, 1998 $ 4,529,984 $ (180,000) $(17,398,752) $(13,046,809)
------------ ------------ ------------ ------------
</TABLE>
(See Notes to Consolidated Financial Statements)
-3-
<PAGE> 6
AIRSTAR TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
UNAUDITED)
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS ENDED
JUNE 30
------------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(3,568,036) $(2,412,322)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,400,024 1,214,894
Compensation expense on issuance of Stock 60,000 (120,636)
Minority interest in subsidiary earnings -- (1,686)
Loss on sale of contract (16,331)
Changes in operating assets and liabilities:
Accounts receivable (197,530) (684,353)
Other receivables (285,113) 45,776
Other assets 3,711 146,717
Accounts payable 2,313,418 541,564
Accrued liabilities 1,126,646 1,472,814
----------- -----------
NET CASH PROVIDED FROM OPERATING ACTIVITIES 853,120 186,437
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (3,513,444) --
Restricted Cash (20,612) --
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (3,534,056) --
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from capital lease financing 3,000,000 --
Payments on related party debt (3,000)
Payments under capital lease obligations (136,447) (102,677)
----------- -----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 2,863,553 (105,677)
----------- -----------
NET INCREASE (DECREASE) IN CASH 182,617 80,760
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,294 55,595
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 183,911 $ 136,355
=========== ===========
</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 June 30, 1998 and 1997, are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash paid for interest and income taxes
Interest $ 331,182 $ 90,310
Income Taxes -- --
Noncash investing and financing activities:
Assets acquired by capital lease $ ---- $3,468,751
</TABLE>
-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 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 $139,301 as of
June 30, 1998.
Revenue Recognition
Revenue derived from telephone services and usage fees is billed and
recorded monthly as the services are provided.
-6-
<PAGE> 9
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> 10
AIRSTAR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The periods presented are the six months ended June 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 June 30, 1998, cash in the amount $1,197,953 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 June 30, 1998, cash in the amount of $1,246,124 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 June 30, 1998 is summarized as follows:
<TABLE>
<CAPTION>
1998
------------
<S> <C>
Machinery and equipment $ 30,361,305
Furniture and fixtures 161,113
Materials and supplies 51,978
------------
30,574,396
Less accumulated depreciation (2,234,258)
------------
Property and equipment, net $ 28,340,138
============
</TABLE>
Depreciation expenses for the periods ended June 30, 1998 and 1997 were
$1,319,526 and $1,206,256 respectively.
-8-
<PAGE> 11
AIRSTAR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
D. RELATED PARTY-DEBT:
<TABLE>
<S> <C>
Notes payable at June 30, 1998 is summarized as follows:
June 30, 1998
-------------
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 $71,969
and $92,864 for the three months ended June 30, 1998 and 1997,
respectively. Future minimum lease payments due under noncancelable
operating leases are as follows:
<TABLE>
<S> <C>
1998 $ 70,146
1999 144,402
2000 76,035
2001 7,668
2002 --
--------
$298,251
========
</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 June 30, 1998.
<TABLE>
<CAPTION>
1998
------------
<S> <C>
Cost $ 30,361,305
Accumulated depreciation (2,172,274)
------------
$28,189,031
===========
</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 $ 2,626,891
1999 6,610,433
2000 6,591,457
2001 6,591,457
2002 6,591,457
Thereafter 44,969,921
-----------
Total Payments 73,981,616
Less amount representing interest 30,393,631
-----------
43,587,985
Less current portion of capital leases 1,514,510
-----------
$42,073,475
===========
</TABLE>
-10-
<PAGE> 13
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
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. On July 2, 1998, the plaintiffs in the Illinois case received
a judgement against the Company for $1,750,000. Management believes a
reasonable estimate of a loss, based on information currently available on
all the above lawsuits, is $1,907,045. Included in contingencies in the
consolidated balance sheet at June 30, 1998, are liabilities of $1,907,045
associated with this action. The Company plans to take all actions
necessary 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 of $20,000 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 June 30, 1998, is a liability of
$170000.
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
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the Company's financial condition as of June 30,
1998 and results of operations for the six months ended June 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 10-KSB 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.
-12-
<PAGE> 15
AIRSTAR TECHNOLOGIES, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
RESULTS OF OPERATION
For the six months ended June 30, 1998, the Company's net sales revenues
increased from $2,943,130 to $3,903,896 an increase of 37% for the same period
in 1997.
For the six months ended June 30, 1998, the Company's gross profit was
$1,415,421, or 36%, as compared to $798,873, or 27% in 1997. The increase in
the margins is a result of reduced trunking costs. 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 further reducing its operating cost of leasing trunk
lines, however, no assurances can be given to that effect.
Selling, general and administrative expenses for 1998 amounted to $1,688,999, or
43% of net sales, as compared to $843,010, or 29% of net sales in 1997. The net
loss of $3,568,036 was predominantly the result of depreciation and amortization
expense of $1,400,024 and interest expense of $1,965,218 for a total of
$3,365,242. 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, 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 to 12 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 June 30, 1998, the Company's aggregate cash and cash equivalent totaled
$2,627,988. 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, which is equal to the additional payments which begin in
January 1999.
-13-
<PAGE> 16
AIRSTAR TECHNOLOGIES, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
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.
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 10-KSB 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 trading symbol was changed
to ASTG.
On July 2, 1998, the plaintiffs in the Illinois litigation received a judgement
against the Company for $1.75 million.
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
August 14, 1998
-16-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 183,911
<SECURITIES> 20,013
<RECEIVABLES> 1,232,799
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,860,787
<PP&E> 30,574,396
<DEPRECIATION> 2,234,258
<TOTAL-ASSETS> 33,814,254
<CURRENT-LIABILITIES> 2,880,543
<BONDS> 0
0
214
<COMMON> 1,745
<OTHER-SE> 4,394,984
<TOTAL-LIABILITY-AND-EQUITY> 33,814,254
<SALES> 0
<TOTAL-REVENUES> 3,903,896
<CGS> 0
<TOTAL-COSTS> 2,488,475
<OTHER-EXPENSES> 3,089,023
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,965,218
<INCOME-PRETAX> (3,568,036)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,568,036)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,568,036)
<EPS-PRIMARY> (.22)
<EPS-DILUTED> 0
</TABLE>
