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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended
June 30, 1996 Commission File No. 1-13764
ELECTRONICS COMMUNICATIONS CORP.
(Exact name of Registrant as specified in its Charter)
Delaware 11-2649088
(State of Incorporation) (IRS Employer Identification No.)
10 Plog Road, Fairfield, New Jersey 07004
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code: (201) 808-8862
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 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for a 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 [ X ] No [ ]
As of August 8, 1996, there were 4,876,762 shares of Common Stock, $.05 par
value outstanding.
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<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31,
-------------- ---------------
1996 1995
---- ----
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash $925,873 $18,000
Restricted Cash $1,100,000 $1,100,000
Accounts Receivable
(Net of $60,450 and $80,987 Allowance for Doubtful
Accounts at June 30, 1996 and
December 31, 1995, respectively.) 2,186,056 2,204,789
Inventories 543,818 476,796
Bid Deposit 1,322,610 1,000,000
Loan Receivable 106,560 550,000
Loan Receivable - Stockholder 81,034 -
Prepaid Expenses 73,447 78,849
-------------- ---------------
TOTAL CURRENT ASSETS 6,339,398 5,428,434
-------------- ---------------
PROPERTY AND EQUIPMENT
Property and Equipment 1,766,348 335,858
Accumulated Depreciation (182,015) (75,544)
-------------- ---------------
NET PROPERTY AND EQUIPMENT 1,584,333 260,314
-------------- ---------------
OTHER ASSETS
Paging Carrier Agreement 978,843 -
Deferred Private Placement Costs 507,181 225,787
Deferred License Costs 323,910 293,810
Security Deposits and Other Assets 144,040 38,313
Goodwill 68,497 -
-------------- ---------------
TOTAL OTHER ASSETS 2,022,471 557,910
-------------- ---------------
TOTAL ASSETS $9,946,202 $6,246,658
============== ===============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
JUNE 30, DECEMBER 31,
-------------- ---------------
1996 1995
---- ----
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES
Accounts Payable $952,446 $1,783,344
Notes Payable - Other 489,000 28,000
Notes Payable - Bank 1,145,000 1,225,000
Notes Payable - Stockholders 18,077 252,007
Current Portion of Obligations Under Capital Leases 77,170 50,244
Private Placement Advance - 116,223
Accrued Expenses and Taxes Payable 565,399 248,764
Customer Deposits 38,742 -
-------------- ---------------
TOTAL CURRENT LIABILITIES 3,285,834 3,703,582
-------------- ---------------
LONG TERM LIABILITIES
Notes Payable Debentures 2,315,000 -
Obligations under Capital Leases 375,281 78,801
-------------- ---------------
TOTAL LONG TERM LIABILITIES 2,690,281 78,801
Minority Interest 470,736 -
STOCKHOLDERS' EQUITY
Common Stock, par value $.05 per share, 40,000,000
authorized, issued and outstanding 3,634,324
at June 30, 1996 and 3,003,697 at December, 31 1995. 206,716 150,186
Additional Paid-In Capital 6,861,834 5,320,629
Retained (Deficit) (3,643,498) (2,947,539)
Notes Receivable arising from Common Stock (25,701) (59,001)
Purchase Warrants Sold
-------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 3,499,351 2,464,275
-------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $9,946,202 $6,246,658
============== ===============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30,
-------------------------------- ------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
SALES
Electronics $1,230,268 $818,820 $2,213,996 $1,725,646
Commissions 1,036,169 708,125 2,315,967 1,404,063
---------------- --------------- -------------- ---------------
TOTAL SALES 2,266,437 1,526,945 4,529,963 3,129,709
---------------- --------------- -------------- ---------------
COST OF SALES
Electronics 971,918 613,992 1,799,734 1,356,657
Commissions 808,962 540,777 1,698,397 1,107,708
---------------- --------------- -------------- ---------------
TOTAL COST OF SALES 1,780,880 1,154,769 3,498,131 2,464,365
---------------- --------------- -------------- ---------------
GROSS PROFIT 485,557 372,176 1,031,832 665,344
---------------- --------------- -------------- ---------------
EXPENSES
Selling 380,566 125,354 514,694 231,423
General and Administrative 685,111 207,808 1,072,239 384,394
---------------- --------------- -------------- ---------------
TOTAL EXPENSES 1,065,677 332,963 1,399,433 615,817
---------------- --------------- -------------- ---------------
OPERATING INCOME (LOSS) BEFORE OTHER EXPENSES
AND INCOME TAXES (580,120) 39,213 (555,101) 49,527
---------------- --------------- -------------- ---------------
OTHER EXPENSES
Interest Expense - Net $43,327 $12,580 67,089 36,886
Settlement of Potential Litigation - - 73,769 -
Amortization of Bridge Financing Costs - $213,958 - 606,943
---------------- --------------- -------------- ---------------
TOTAL OTHER EXPENSES 43,327 226,538 140,858 643,829
---------------- --------------- -------------- ---------------
NET LOSS BEFORE INCOME TAXES (623,447) (187,325) (695,959) (594,302)
Income Taxes - - - -
---------------- --------------- -------------- ---------------
NET LOSS (623,447) (187,325) (695,959) (594,302)
RETAINED (DEFICIT), BEGINNING OF PERIOD (3,020,051) (725,557) (2,947,539) (318,580)
---------------- --------------- -------------- ---------------
RETAINED (DEFICIT), END OF PERIOD ($3,643,498) ($912,882) ($3,643,498) ($912,882)
================ =============== ============== ===============
LOSS PER COMMON SHARE ($0.19) ($0.06) ($0.21) ($0.18)
================ =============== ============== ===============
AVERAGE COMMON SHARES OUTSTANDING (NOTE 11) 3,299,792 3,299,792 3,299,792 3,299,792
================ =============== ============== ===============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
------------------------------
JUNE 30, JUNE 30,
------------------------------
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss ($695,959) ($594,302)
Adjustments to Reconcile Net Loss to
Net Cash Used By Operations:
Issue of Common Stock For Marketing Agreement 187,500
Depreciation and Amortization 21,881 625,921
Non-Cash Settlement of Potential Litigation 73,762
Changes in:
Accounts Receivable 293,636 134,345
Inventories 4,208 (263,360)
Prepayments 17,065 (44,697)
Accounts Payable (1,123,540) (797,652)
Accrued Expenses and Taxes Payable 222,325 14,588
Customer Deposits 38,742 (5,328)
Changes in assets and liabilities net of effects
from purchase of Threshold Communications, Inc.
Accounts Receivable (274,903) -
Inventory (71,230) -
Prepaid Expenses (11,663) -
Accounts Payable 292,642 -
Accrued Expenses and Taxes Payable 904 -
TOTAL ADJUSTMENTS (328,671) (336,183)
-------------- ---------------
NET CASH USED BY
OPERATING ACTIVITIES (1,024,630) (930,485)
-------------- ---------------
CASH FLOWS FROM INVESTING
ACTIVITIES
Stockholder Loans Receivable (81,034) -
Notes Receivable arising from Common Stock 33,300 -
Purchase Warrents
Deferred Private Placement Costs (281,394) -
Deferred License Costs (30,100) -
Additions to Property and Equipment (221,545) (315,994)
Bid Deposit (322,610) -
Payment for purchase of Threshold Communications, Inc.
net of cash acquired (180,556) -
Other Assets (82,149) (107,956)
-------------- ---------------
NET CASH USED BY INVESTING
ACTIVITIES (1,166,088) (423,950)
-------------- ---------------
CASH FLOWS FROM FINANCING
ACTIVITIES
Payments of Shareholder Loans (243,071) 7,276
Proceeds of Other Loans 111,000 (45,000)
Payments of Bridge Loans - (800,000)
Payments of Bank Loans (80,000) (90,000)
Proceeds from Debentures 2,808,406 100,000
Principal Payments under Capital Lease Obligation (28,994) -
Sale of Common Stock 531,250 3,869,937
-------------- ---------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 3,098,591 3,042,213
-------------- ---------------
NET INCREASE IN CASH 907,873 1,687,778
CASH, BEGINNING OF PERIODS 18,000 136,203
-------------- ---------------
CASH, END OF PERIODS $925,873 $1,823,981
============== ===============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------
1996 1995
---- ----
SUPPLEMENTAL DISCLOSURE FOR CASH FLOWS
CASH PAID DURING THE YEAR FOR :
Interest $67,089 $36,886
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Property Acquired Under Capital Leases ($352,400) -
See Notes to Consolidated Financial Statements.
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Business Activity and Basis of Presentation
On February 1, 1994, Electronics Communications Corp. (the "Company")
changed its name from Genetic Breeding, Inc. to Internow Affiliates,
Inc. and then to Electronics Communications Corp. Effective on January
1, 1994, the Company acquired Free Trade Distributors, Inc. (which
engages in the wholesale distribution of cellular telephones and
related accessories and electronic automobile and office products) and
Trade Zone Distributors, Inc. (which engages in the activation of
cellular radio subscribers for commissions, both serving the New York
Metropolitan Area) in a business combination accounted for as a
reverse acquisition (the "Acquisition"). Accordingly, the historical
financial statements of Free Trade Distributors, Inc. and Trade Zone
Distributors, Inc. (the "Operating Entities" or "Acquirers") are
included in the consolidated statements of operations for the periods
prior to the Acquisition. The assets acquired and the liabilities
assumed were recorded at cost. Historical Stockholders' Equity of the
Operating Entities has been retroactively restated, as set forth in
Note 2, in that the number of shares of common stock received in the
Acquisition, after adjustment of the par value of the Company's and
the Acquirers' common stock with an offset to additional paid-in
capital. Retained earnings (deficiency) of the Acquirers were carried
forward.
In February 1995, the Company formed Electrocomm Wireless, Inc., a
Delaware corporation as a subsidiary, to become a radio paging and
two-way radio carrier in the New York Metropolitan Area and the
State of New Jersey. On January 6, 1995, Electrocomm Wireless, Inc.
entered into a one year contract to utilize the transmission
facilities of an unaffiliated paging carrier to commence paging
operations. The agreement required a non-refundable one-time
connection fee of $20,000, a monthly per diem charge per radio paging
customer and the Company's pro rata share of monthly access charges.
The contract expired in January and was not renewed. The Company is in
the process of securing FCC licensing for paging, two-way radio
transmission and personal communication services.
In July 1995 the Company formed Personal Communications Network, Inc.
a Delaware corporation, as a wholly owned subsidiary to participate in
the Federal Communications Commission auction for licenses to engage
in personal communications services ("PCS"). The Company has posted a
bid deposit of $1,000,000. On May 8, 1996 the Company obtained six PCS
licenses entitling it to operate wireless PCS telephone systems
covering nearly 1.5 million people in three states.
On June 28, 1996, the Company acquired 51% of Threshold
Communications, Inc. (which engages in the business of providing radio
paging services in the New York Metropolitan Area.)
On March 22, 1996, Threshold Communications, Inc. ("TCI") acquired
substantially all of the assets and assumed certain liabilities of
General Communications and Electronics, Inc. ("GCE"). TCI also
acquired as part of this transaction 56 2/3% of the outstanding stock
of General Towers of America, Inc. (which engages in the business of
providing two way radio services in the New York Metropolitan Area).
TCI and its subsidiary General Towers of America, Inc. ("GTA") are
treated as subsidiaries of the company.
The accompanying unaudited 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 Article 10 of Regulation S-X. Accordingly, they do not
necessarily include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management all adjustments (consisting
of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the six months
ended June 30, 1996 are not necessarily indicative
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
(A) Business Activity and Basis of Presentation - (Continued)
of the results that may be expected for the year ended December 31,
1996. The unaudited consolidated financial statements should be read
in conjunction with the consolidated financial statements and
footnotes thereto included in the Company's annual report on form
10-SB for the year ended December 31, 1995.
(B) Principles of Consolidation
The consolidated financial statements include the accounts of
Electronics Communications Corp., subsequent to the Acquisition, and
its wholly-owned subsidiaries, Free Trade Distributors, Inc., Trade
Zone Distributors, Inc. (Trade Zone Distributors , Inc. has a wholly
owned subsidiary, Trade Zone Distributors, II, Inc. which is an
inactive, non-operating entity), Electrocomm Wireless, Inc., Personal
Communications Network, Inc. and its majority owned subsidiary of
Threshold Communications, Inc. and TCI's majority owned subsidiary
General Towers of America, Inc. All significant intercompany accounts
and transactions have been eliminated in consolidation.
(C) Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided
using accelerated methods over the estimated useful lives of the
respective assets (5 to 7 years). Depreciation expense charged to
operations for the six months ended June 30, 1996 and 1995 was $21,881
and $18,978, respectively.
(D) Inventories
Inventories are valued at the lower of cost or market, cost is
determined using the first in, first out method.
(E) Revenue Recognition
It is the Company's policy to categorize revenue into either sales
from electronic goods, commissions for fees earned on sales of
cellular radio service contracts, or sales from its radio paging and
two way radio services. Sales from electronic goods includes but is
not limited to cellular phones and related accessories and other
electronic automobile and office products. Revenue from the above
mentioned products are recognized when they are shipped. Revenues from
sales of electronic goods represented 57% of the Companies total
revenue in 1995. Commissions are inclusive of fees earned for the sale
of cellular radio service contracts and residuals received on those
contracts. Revenues and related commissions from the sale of the
service contracts are recognized at the point of activation. Revenues
from residuals are realized when approved by the cellular radio
service supplier and are paid on customer usage for a maximum of three
years. Commission revenue represented 43% of the Company's total
revenue in 1995. The Company establishes a reserve of 3.5% for
charge-backs on customers that prematurely terminate cellular service.
In addition to the commissions paid by the cellular radio supplier,
the Company receives co-op fees. Co-op fees are reimbursements of
expenditures that are approved by the cellular radio supplier for
advertising and promotion in connection with the sale of cellular
radio contracts. Revenues from radio paging and two way radio services
are recognized in the beginning of the month for which they are
invoiced.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
(F) Concentration of Credit Risk
The Company maintains its major cash accounts in banks in the New York
and New Jersey Area. The total cash deposits are insured by the
Federal Deposit Insurance Corporation up to $100,000 per account.
The Company currently receives all of its commission revenue from two
major cellular radio carriers. Although there are a limited number of
sources for this type of revenue, management believes that other
sources could provide similar commissions on comparable terms. A
change in carriers could cause a delay in activations and a loss of
sales which would affect operating results adversely.
(G) Use of Estimates
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 the reported amounts of revenues
and expenses during the period. Actual results could differ from those
estimates.
NOTE 2 - ACQUISITION, RECAPITALIZATION AND PUBLIC OFFERING
(A) As described in Note 1, the Company acquired all of the
outstanding common stock of the Operating Entities. For accounting
purposes the acquisition has been treated as a recapitalization of the
Operating Entities with the Operating Entities as the Acquirers
(reverse acquisition). The historical financial statements prior to
January 1, 1994 are those of the Operating Entities. As a result of
this transaction, historical additional paid-in capital of the
Operating Entities was retroactively reduced and common stock
increased by $58,804 for the par value of the 1,176,086 shares of
common stock received in the transaction. Prior to the acquisition,
Free Trade Distributors, Inc. had 200 shares outstanding at $75 par
value or $15,000 in common stock and $60,000 in additional paid-in
capital. The recapitalization of these shares resulted in a transfer
from common stock to additional paid-in capital of $15,000. In 1993,
Trade Zone Distributors, Inc. was capitalized and issued 200 shares of
$5 par value or $1,000 in common stock. The recapitalization of these
shares resulted in a transfer from common stock to additional paid-in
capital in the amount of $1,000. As a result of the reverse
acquisition, additional paid-in capital was also reduced by $13,354 on
January 1, 1994 (the effective date of the acquisition). This is
reflective of the excess liabilities assumed over the assets by the
Operating Entities. On January 1, 1994, the Company sold 340,000
shares of its common stock for $50,000. All references in the
financial statements and notes thereto to the number of shares
outstanding have been restated to reflect the 1 for 5 reverse common
stock split described below. Additionally, on May 25, 1995, 47,611
shares were issued to a shareholder who did not receive the proper
allocation when the company had its reverse common split in Note 2B.
(B) On May 12, 1995 the Company successfully completed a public
offering (the "Offering"). The Company sold 1,000,000 shares of Common
Stock and 2,000,000 Common Stock Purchase Warrants at an initial
offering price of $5.00 per share and $.10 per Warrant. In order to
complete this transaction the Board approved a 1 for 5 reverse common
stock split, in order to reduce the authorized Common Stock from
42,000,000 shares to 8,400,000 shares and increase the par value of
the shares from $.01 to $.05. The Company also registered 1,000,000
shares of common stock owned by certain officers, directors and
stockholders. In addition, the Company granted the Underwriter an
option to purchase up to 100,000 shares of Common Stock and 200,000
Common Stock Purchase Warrants. On September 12, 1995 the Underwriter
exercised the over-allotment option to purchase an additional 300,000
<PAGE>
NOTE 2 - ACQUISITION, RECAPITALIZATION AND PUBLIC OFFERING - (Continued)
warrants. All references in the financial statements to average
number of shares outstanding, per share amounts and stock option
plan data have been restated to reflect the reverse common stock
split.
(C) On January 16, 1996 the Company consummated a Private Placement
Offering of 69,460 shares of the Company's $.05 par value common stock
at a price of $2.25 per share. The total offering resulted in gross
proceeds of $156,218 of which $116,223 was advanced to the Company
prior to December 31, 1995. Each subscriber, in addition to the
shares, received demand registration rights, which require the Company
to file a Registration Statement upon request of 25% or more of the
shares sold in the offering at anytime during the 18 month period
commencing 30 days from the closing date. In March 1996, the
subscribers demanded that the Company file a Registration Statement
covering their shares. The Company at that time was unable to comply
with the request. In order to avoid a potential litigation for failing
to file a Registration Statement on a timely basis, the Company issued
a aggregate of 34,715 additional shares to the subscribers. The
additional cost of these shares issued were treated as an increase of
additional paid in capital and expensed as a settlement of potential
litigation.
(D) On March 21, 1996, the Company entered into a letter of intent
with an investment banking firm (the "Placement Agent"), pursuant to
which the Company will offer $6,000,000 principal amount of the
Company's Subordinated Convertible Debenture (the "Debenture"). The
principal amount of the Debentures shall be convertible into shares of
the Company's common stock at the option of the holder, immediately
upon issuance, at a price equivalent to 25% discount from the average
high closing bid price for five days prior to the conversion or $1.50,
whichever is less. The Debenture bears interest at the rate of 5% per
annum payable on April 1 of each year commencing April 1, 1997. The
Debentures are redeemable and callable for conversion under certain
circumstances and are due April 1, 2002. The Company has advanced to
the Placement Agent a placement fee equal to 10% of the gross
proceeds, a 2% non-accountable expense allowance and to issue 200,000
Warrants to purchase the Company's common stock at $2.25 per share.
The Company intends to use the proceeds of this offering to increase
its deposit in the PCS auction, build out its paging system and
general working capital purposes. On June 25, 1996 $400,000 was
converted into 266,667 shares of Common Stock in accordance with the
Debenture.
(E) On April 8, 1996, the Company entered into a contractual agreement
with a public relations and direct marketing firm for the intention of
making its name and business better known to shareholders, investors
and brokerage houses. The agreement is for a period of four months.
The Company issued 100,000 shares of its Common Stock and expensed
$187,500 for Marketing Cost.
(F) On May 22, 1996, the Company completed a private placement of
500,000 shares of unregistered Common Stock for $625,000 ($1.25 per
share). The Company paid $93,750 in associated placement fees and
legal costs.
(G) On June 28, 1996, the Company purchased 51% of the common stock
of TCI and its majority owned subsidiary GTA for $725,000 in cash and
$389,000 of its common stock (194,500 shares at $2.00 per share).
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts Receivable consist of amounts due for sales of electronic
goods, commissions due from major cellular radio suppliers and from
sales of radio paging and two way radio service. Components of
Accounts Receivable are $1,132,851 for the sale of electronic goods,
$282,697 for commissions, and $299,708 for the sale of radio paging
and two way radio service at June 30, 1996 and $1,503,303, $782,473
and $ -0- at December 31, 1995.
<PAGE>
NOTE 4 - OTHER ASSETS
(A) Deferred private placement costs consist of certain legal,
accounting, printing fees and other costs in connection with the
private placement described in Note 2D. Those costs, together with any
additional costs incurred in connection with the placement will be
recorded as a reduction of the proceeds to be received from the sale
of the securities offered.
(B) Deferred License Costs consists of various legal, consulting and
registration fees in connection with obtaining paging licenses,
two-way radio licenses and ersoanl communication service licensing.
Any interest cost associated with obtaining these licenses will be
capitalized. The licenses when put into service will be amortized
over a fifteen year period.
(C) The Paging Carrier Agreement consists of six paging licenses with
various paging carriers. The cost of such agreements are being
amortized over a fifteen year period.
NOTE 5 - LOAN RECEIVABLE
As of December 31, 1995, the Company has loaned $550,000 to TCI. TCI
is a recently formed corporation engaged in the radio paging business,
having acquired a paging subscriber base, associated paging hardware,
and a paging carrier agreement with SkyTel(R), a company that provides
nationwide paging, voice messaging and related messaging services to
subscribers and others. TCI has informed the Company that it intends
to engage in the radio paging carrier business utilizing, among other
assets, one or more 900 megahertz FCC paging licenses for the New
York-New Jersey area, a long-term lease for a paging transmission site
in New Jersey which it currently owns, and a customer base of
approximately 9,000 paging service subscribers.
On March 22, 1996, TCI has entered into an agreement to acquire
approximately 6,000 paging service subscribers and other related
assets. The Company has advanced and additional $175,000 in cash and
$389,000 in Common Stock to TCI and has guaranteed certain obligations
in the amount of $739,000 for TCI. As of the date hereof, the Company
had not entered into an agreement as to an acquisition or investment
in TCI.
On November 1, 1995, the Company entered into an agreement (the
"Agreement") with TCI which superseded a prior agreement between the
parties. Under the Agreement, in consideration of the aforesaid
advances and guarantees, the Company obtained an exclusive option
from TCI to acquire or invest in TCI on terms to be mutually agreed
upon. The option agreement further provides that if, on or before
January 31, 1996, the acquisition of TCI by the Company or an
investment by the Company in TCI has not been consummated, the Company
may demand repayment of these advances. If such advances are not
repaid within ten business days of such demand, the Company, at its
option, may foreclose on 100% of the stock of TCI which has been
pledged as collateral for the advances. The Agreement recites that the
specific terms of any acquisition of or investment in TCI cannot be
determined at this time and that the Company is under no obligation to
complete any such transaction. Any such transaction will require the
approval of the Board of Directors of the Company and will be subject
to the entry into definitive written agreements.
On June 28, 1996, TCI satisfied its indebtedness to the Company as
described by the transaction in Note 2E.
On June 30, 1996 the loan receivable consists solely of a note due
from one of the Company's consultants. This note is due December 31,
1996 and bears an interest rate of 8% payable on demand.
<PAGE>
NOTE 6 - BID DEPOSIT
The Company had participated in a Federal Communications Commission
(the "FCC") auction for Personal Communication Services licenses. The
FCC required an advance payment in the amount of $1,000,000 which is
fully refundable in the event the Company is not the highest bidder.
On May 8, 1996 the Company obtained six PCS licenses entitling it to
operate wireless PCS telephone systems covering nearly 1.5 million
people in three states.
NOTE 7 - NOTES PAYABLE
Notes Payable consist of the following:
(A) Notes Payable-Other in the amount of $28,000 at December 31, 1995,
and $5,000 at June 30, 1996 with interest at 10%, are payable on
demand. Payment of the notes are personally guaranteed by certain
officers and stockholders, and secured by a pledge of their personal
property.
On February 29, 1996, the Company entered into a financing arrangement
with a corporation in the amount of $134,000. Interest is payable at a
rate of 10% in monthly installments of $1,117 per month. As additional
consideration, the Company issued the corporation 800,000 "A" warrants
with 90 day registration rights and "piggy back" registration rights
with any other offering of the Company.
In connection with TCI's acquisition of GCE, the Company assumed a
$350,000 non-interest bearing note payable to a corporation owned by a
shareholder of the Company.
(B) Notes Payable-Bridge Financing consisted of an aggregate of
$800,000, 12% promissory notes, with principal and interest due on the
earlier of the closing of the Public Offering or November 1, 1995.
Payment of the notes were secured by a security interest in the
Company's accounts receivable, a pledge of the shares of Common Stock
of the Company owned by its officers, directors and certain
stockholders, and was guaranteed by the Company's President. In
connection with the bridge financing the Company issued to the
investors an aggregate of 240,000 shares of Series A Preferred Stock
(the "Preferred Stock") and 480,000 Series A Preferred Stock Purchase
Warrants (the "Preferred Warrants") with a Fair Value of $511,500.
Each investor exchanged their Preferred Stock and Preferred Warrants
into an identical number of shares of Common Stock and Class A
Redeemable Common Stock Purchase Warrants on the effective date of the
Offering. These notes were paid on May 19, 1995.
(C) On April 18, 1995, the Company entered into a financing agreement
with a bank in the amount of $100,000. This loan is personally
guaranteed by the Company's President, cross corporate guaranteed by
Free Trade and secured by the Company's inventory. Interest is payable
monthly at the rate of 1.5% per annum in excess of the bank's
fluctuating prime lending rate. As of the date hereof, the interest
rate was 10.5%. The loan becomes due and payable on April 18, 1996. At
June 30, 1996 the balance on this loan was $45,000. This note was
temporarily extended by the bank . On June 17, 1996 the bank extended
the due date until April 17, 1997.
(D) On October 6, 1995, the Company entered into a lending arrangement
with a bank. In connection therewith, the Company could borrow up to
$700,000 at an interest rate of 3/4% above the bank's base lending
rate, payable on demand. At December 31, 1995, the interest rate was
9.5%. The Company deposited a $700,000 three month certificate of
deposit with the bank as collateral for such loan. The Certificate
earns a 5% interest. The loan is also secured by certain officers'
personal guarantees, 245,000 shares of their stock and all the assets
of the Company. On January 6, 1996 and then again on April 6, 1996
<PAGE>
NOTE 7 - NOTES PAYABLE - (Continued)
the bank extended the due date 90 days. The note has been extended
until October 6, 1996.
(E) On December 22,1995, the Company entered into a lending
arrangement with a bank. In connection therewith, the Company borrowed
$450,000 at an interest rate of 1% above the bank's base lending rate,
payable in ninety days. At December 31, 1995, the interest rate was
9.75%. The Company deposited a $400,000 three month certificate of
deposit with the bank as collateral for such loan. The Certificate
earns a 5% interest. The loan is also secured by certain officers' and
directors' personal guarantees and inventory. On March 22, 1996 the
bank extended the due date 90 days. The note has been extended until
September 22, 1996.
NOTE 8 - CAPITAL LEASE
Capital Leases include $163,834 for equipment. Minimum future lease
payments under capital leases as of June 30, 1996 for each of the next
five years and in the aggregate are:
1996 $99,247
1997 149,806
1998 132,448
1999 130,870
2000 114,122
------------
Total Minimum Lease Payments 624,493
Less: Amount Representing (174,042)
Interest
-------------
Present Value of Net
Minimum Lease Payments 452,451
Less: Current Maturities
included in Current (77,170)
Liabilities
-------------
Long Term Obligations Under
Capital Leases $375,281
============
The interest rates on the capitalized leases rage from 10% to 29.17%
and are imputed based on the lower of the Company's incremental
borrowing rate at the inception of each lease or the lessors implicit
rate of return.
NOTE 9 - NOTES PAYABLE-STOCKHOLDERS
Notes Payable-Stockholders are unsecured and payable on demand with
interest at rates from 7.5% to 10.65% per annum on the outstanding
principal at June 30, 1996 and December 31, 1995.
NOTE 10 - OTHER ADVERTISING AND PROMOTIONAL SERVICES
On July 21, 1995, the Company entered into an Advertising and
Promotional Services Agreement, pursuant to which the Company agreed
to issue 200,000 shares of its Common Stock, $.05 par value, in
exchange for services provided to the Company. These services included
analysis, advice, advertising and promotional ideas and marketing
campaign in connection with the Company's development of its
distribution of cellular products in South America. The Company issued
the stock to the consultant on August 8, 1995 which resulted in a
non-cash expense of $1,075,000 in the year ending December 31, 1995.
<PAGE>
NOTE 11 - EARNINGS PER COMMON SHARE
The Company computes earning (loss) per common share by dividing the
net income (loss) by the weighted average number of shares of common
stock, as retroactively adjusted to reflect shares issued for the
business combination described in Note 1A and the 1 for 5 reverse
common stock split described in Note 2A, and common stock equivalents
outstanding during the period.
NOTE 12 - CONVERTIBLE PREFERRED STOCK
The Series A Preferred Stock was issued in connection with the Bridge
Financing described in Note 7B. On May 19, 1995, the holders of
preferred stock have exchanged the 240,000 shares of Series A
Preferred Stock for 240,000 shares of Common Stock. As a result of the
conversion, additional paid-in capital was reduced by $9,600.
NOTE 13 - WARRANTS TO PURCHASE COMMON STOCK
The Company approved the sale to certain officers, directors and
stockholders of 1,000,000 Common Stock Purchase B Warrants at a price
of $.10 per Warrant, exercisable at $5.00 per share. On November 30,
1994, the Company issued 990,000 Common Stock Purchase B Warrants for
$.10 per Warrant, payable by the Company accepting promissory notes
bearing interest at 8% per annum due on the earlier of the exercise of
the Warrants, or December 1, 1996. On January 20, 1995, the Company
agreed to reduce the exercise price of 300,000 B Warrants from $5.00
to $2.50 and amended the exercise period of these 300,000 B Warrants
so that they are not exercisable until February 1, 1996.
NOTE 14 - INCOME TAXES
The Company adopted the liability method of accounting for income
taxes, as set forth in Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes." Under the liability method,
deferred taxes are determined based on the differences between the
financial statement and tax basis of assets and liabilities at enacted
tax rates in effect in the years in which the differences are expected
to reverse. The Company has net operating loss carryforwards that it
does not expect to utilize pursuant to Internal Revenue Regulations.
NOTE 15 - CONTINGENT LIABILITIES
(A) On December 1, 1994, the Company entered into an employment
agreement with the President of the Company for a term of five years
with an option for an additional three one year terms. The agreement
provides for annual compensation of $150,000 during the term of the
employment agreement and entitles the President to certain fringe
benefits, including automobile maintenance, disability insurance,
medical benefits and life insurance coverage. The President has agreed
that during the term of his agreement and for 12 months thereafter
(unless the agreement is terminated without cause), he will be subject
to non-competition provisions. Upon termination of employment without
cause, the President will be entitled to a lump sum payment of $75,000
multiplied by the number of years of his employment by the Company.
(B) The Company has engaged a management company, which is an
affiliate of the Underwriter used in the Public Offering described in
Note 2B, as the Company's management consultant, for a period of 15
months commencing December 14, 1994, at a fee of $75,000 (exclusive of
out-of-pocket expenses), which was paid on May 12, 1995. In addition,
the Company has agreed, subject to any required regulatory approvals,
to pay the Representative a finder's fee, in the event that the
Representative originates within five years following the Effective
Date of the offering a merger, acquisition, joint venture or other
transaction to which the Company is party, in the amount equal to 5%
of the first $4,000,000, 4% of the next $1,000,000, 3% of the next
$1,000,000 and 2% of the excess, if any, over $6,000,000 of the
consideration actually received by the Company in any such
transaction.
<PAGE>
NOTE 15 - CONTINGENT LIABILITIES - (Continued)
(C) On June 1, 1995, the Company entered into a consulting agreement
with a corporation owned by four of the Company's legal
representatives for non-legal services. In consideration for services
performed by the consultant the Company agreed to pay $144,000 per
year for five years payable in monthly installments of $12,000.
(D) On May 17, 1995, the Company entered into an employment agreement
with Mr. Les Winder , which agreement was amended on October 1,
1995. The term of the agreement is for five years with an option for
additional one year terms. The agreement provides for annual
compensation of $137,500 during the term of the employment agreement
and entitles the President to certain fringe benefits, including
automobile maintenance, disability insurance, medical benefits and
life insurance coverage. Mr. Winder has agreed that during the term of
his agreement and for 6 months thereafter (unless the agreement is
terminated without cause), he will be subject to non-competition
provisions. Upon termination of employment without cause, Mr. Winder
will be entitled to a lump sum payment of $50,000 multiplied by the
number of years of his employment by the Company.
NOTE 16 - MAJOR SUPPLIERS
During the year ended December 31, 1994 and 1995 Free Trade
Distributors, Inc. purchased 100% of its cellular telephones and
related accessories from four major suppliers and Trade Zone
Distributors, Inc. received 100% of its income from two cellular radio
suppliers.
NOTE 17 - OPERATING LEASE
In early 1994, the Company's leased office and warehouse space under
an operating lease agreement on a month to month basis. The rental
expense for the period ended June 30, 1996 and June 30, 1995 was
$76,657 and $29,798 respectively.
On May 20, 1994 Free Trade Distributors Inc. entered into a five year
operating lease expiring May 31, 1999 for an 8,000 square foot
warehouse and office facility.
On May 15, 1996. the Company entered into a five year operating lease
expiring May 31, 2001 for a 14,000 square foot warehouse and office
facility.
The minimum future rental payments under these non-cancelable
operating leases for each of the remaining years are:
1996 $ 85,443
1997 170,888
1998 170,888
1999 135,888
2000 110,888
----------
Total Minimum Future
Rental Payments $673,995
==========
<PAGE>
NOTE 18 - AMENDMENT TO CERTIFICATE OF INCORPORATION
On March 12, 1996, at a meeting of the Company's shareholders a
majority of the Company's shareholders voted in favor of an amendment
to the Company's Certificate of Incorporation to increase the number
of authorized shares of the Company's common stock from 8,400,000 to
40,000,000.
NOTE 19 - STOCK OPTION PLAN
The Company's Board of Directors adopted a Stock Option Plan (the
"Plan"), approved by stockholders, under which, options to purchase up
to an aggregate of 500,000 shares of Common Stock are available for
grants to officers, directors, consultants and key employees of the
Company. The Plan provides for the grant of incentive stock options,
non-qualified stock options and Director's options. The Plan will
terminate in 2004, unless sooner terminated by the Board of Directors.
As a result of the reverse split the Board of Directors, with
stockholders approval, increased the number of shares of Common Stock,
after the effective date of the reverse split, which may be subject to
options granted under the Plan from 100,000 to 300,000. On July 10,
1995 the Company issued 20,000 options to a director of the Company at
a price of $3.80, 5,000 of these options were exercisable immediately,
5,000 on July 10, 1996, 5,000 on July 10, 1997 and 5,000 on July
10,1998 and expire on July 10, 2,000. The fair value of the stock was
less than the option price therefore no compensation expense was
recognized in 1995.
NOTE 20 - PENDING LITIGATION
On March 4, 1996 the Company commenced an action entitled Electronics
Communications Corp. as Plaintiff against Toshiba America Consumer
Products, Inc. ("Toshiba") and Audiovox Corporation, case number 96
Civ. 1565 in United States District Court, Southern District of New
York. The complaint asserts claims for antitrust, breach of contract,
tortious interference with contract and tortious interference with
prospective economic advantage and business relations. The complaint
seeks damages in excess of $ 5,000,000. This action was commenced
because the Company expended significant monies and resources
including the issuance of 200,000 shares of the Company's Common Stock
to a consultant in anticipation of South American cellular telephone
program which the Company was to undertake exclusively of behalf of
Toshiba. Immediately prior to the commencement of the program, Toshiba
discontinued manufacturing the line of cellular telephones that the
program was designed to offer. This unilateral decision has caused
significant damages to the Company and the Company will vigorously
prosecute this claim.
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1996 Compared to the Three Months Ended June 30,
1995
During the three months ended June 30, 1996 revenues from sales increased
$739,492 or 48.4% compared to the same period in 1995. Electronic equipment
sales increased $411,448, activation commissions and residual income increased
during the period by approximately $328,044 or approximately 50.3% and 46.3%
respectively. The increase in electronic equipment resulted from an aggressive
marketing effort. The Company sold a greater percentage of communication
equipment, versus home/office equipment in this quarter compared to last year.
The increase in commissions was due to increased activations of cellular
telephone numbers, as a direct result of an advertising campaign for the
Company's direct sales division and an increase in residuals as a result of the
Company's larger subscriber base with Bell Atlantic/Nynex Mobile.
Cost of electronic equipment sales increased $357,926 compared to the same
period in 1995, as a result of higher overall sales of electronic equipment.
Gross profit from electronics equipment sales decreased approximately 4% from
25% to 21% during the same period in 1996. The decrease in gross profit was due
to greater sales of communications equipment which the Company generally sells
at a lower gross profit margin. The Company does not rely on any one major
equipment supplier, however, during the quarter the Company purchased 100% of
its cellular phones from four suppliers, the loss of any one of them would have
a negative impact on the Company.
Cost of activation commissions and residual income increased $268,185
compared to the same period in 1995, due to an increase in revenues. The gross
profit percentage related to these sales decreased approximately 1.7% from 23.6%
for the three months ended June 30, 1995 versus 21.9% for the three months ended
June 30, 1996 as a result of relatively greater sales through sales agents.
Selling expenses increased approximately $255,000 for the three months
ended June 30, 1996 as compared to the same period in 1995 due to increased
advertising and sales commissions paid during the same comparative periods.
General and administrative expenses increased approximately $477,502 for the
three months ended June 30, 1996 as compared to the same period in 1995. This
increase is due to a larger number of employees, expenses related to moving the
Company headquarters, increased legal and accounting expenses related to the
successful bid for personal communications service licenses, a $187,500
non-cash expense related to the issuance of 100,000 shares of the Company's
common stock to a financial public relations firm and legal fees related to
the legal action commenced against Toshiba America Consumer Products, Inc.
2
<PAGE>
The Company had a net operating loss before other expenses and income
taxes of $(580,120) for the three months ended June 30, 1996 compared to a
profit of $39,213 for the three months ended June 30, 1995.
Interest expenses increased approximately $30,000 compared to the same
period in 1995. However, the Company did not experience any additional non-cash
financing costs, comparable to those incurred in 1995 as a result of the
Company's Bridge Financing completed in December 1994
Six Months Ended June 30, 1996 Compared to the Six Months Ended June 30, 1995
During the six months ended June 30, 1996 revenues from sales increased
approximately $1,400,254 or 44.7% compared to the same period in 1995.
Electronic equipment sales increased approximately $488,350, activation
commissions and residual income increased during the period by approximately
$911,904 or approximately 28.3% and 64.9% respectively. The increase in
electronic equipment resulted from an aggressive marketing effort. The Company
sold a greater percentage of communication equipment, versus home/office
equipment in this quarter compared to last year. The increase in commissions was
due to increased activations of cellular telephone numbers, as a direct result
of an advertising campaign for the Company's direct sales division and an
increase in residuals as a result of the Company's larger subscriber base with
Bell Atlantic/Nynex Mobile.
Cost of electronic equipment sales increased $443,077 compared to the same
period in 1995, as a result of higher overall sales of electronic equipment.
Gross profit from electronics equipment sales decreased approximately 2.7% from
21.4% to 18.7% during the same period in 1996. The decrease in gross profit was
due to greater sales of communications equipment which the Company generally
sells at a lower gross profit margin. The Company does not rely on any one major
equipment supplier, however, during the quarter the Company purchased 100% of
its cellular phones from four suppliers, the loss of any one of them would have
a negative impact on the Company.
Cost of activation commissions and residual income increased $590,689
compared to the same period in 1995, due to an increase in revenues. The gross
profit percentage related to these sales increased approximately 5.6% from 21.1%
for the six months ended June 30, 1995 versus 26.7% for the six months ended
June 30, 1996 as a result of relatively greater sales through sales agent.
Selling expenses increased approximately $283,271 for the six months ended
June 30, 1996 as compared to the same period in 1995 due to increased
advertising and sales commissions paid during the same comparative periods.
General and administrative expenses increased approximately $687,845 for the six
months ended June 30, 1996 as compared to the same period in 1995. This increase
is due to a larger number of employees, expenses related to moving the Company
headquarters, increased legal and accounting expenses related to the successful
bid for
3
<PAGE>
personal communications service licenses, a $187,500 non-cash expense related
to the issuance of 100,000 shares of the Company's common stock to a financial
public relations firm and legal fees related to the legal action commenced
against Toshiba America Consumer Products, Inc.
The Company had a net operating loss before other expenses and income
taxes of approximately $(555,101) for the six months ended June 30, 1996
compared to a profit of $49,527 for the six months ended June 30, 1995.
Interest expenses increased approximately $30,203 compared to the same
period in 1995. However, the Company did not experience any additional non-cash
financing costs, comparable to those incurred in 1995 as a result of the
Company's Bridge Financing completed in December 1994
LIQUIDITY AND CAPITAL RESOURCES
The operations of the Company's subsidiaries since inception in 1991 to
date have been funded principally from cash flow from operations, capital
investments and loans from officers, directors, principal stockholders and third
parties. Although the officers and directors of the Company have provided the
financial accommodations to the Company in the past, there can be no assurance
that they will continue to do so in the future. In addition, the Company has a
$100,000 revolving line of credit with a bank. This loan is personally
guaranteed by the Company's President and a cross corporate guaranty of Free
Trade and secured by the Company's inventory. As of June 30, 1996, there was an
outstanding balance under this loan of $100,000 with interest payable monthly at
the rate of 1.5% per annum in excess of the bank's fluctuating prime lending
rate. As of June 30, 1996, the interest rate was 10.5%. This loan is due and
payable on April 17, 1999.
On October 6, 1995 the Company entered into a lending arrangement with a
bank. In connection therewith, the Company can borrow up to $700,000 at an
interest rate of 3/4% above the bank's base loan rate. As of June 30, 1996, the
interest rate was 9.5%. The Company deposited a $700,000 three month certificate
of deposit with the bank as collateral for such loan. The certificate of deposit
earns 5% interest. The loan is also secured by certain officers' personal
guarantees, 245,000 shares of their stock and all of the assets of the Company.
The note is a ninety date note which becomes due and payable on October 6, 1996.
The note has been renewed for successive three month terms since January 6,
1996.
4
<PAGE>
On December 22, 1995, The Company entered into a lending arrangement with
a bank. In connection therewith, the Company borrowed $450,000 at an interest
rate of 1% above the bank's base lending rate, payable in ninety days. On March
31, 1996, the interest rate was 9.75%. The Company deposited a $400,000 three
month certificate of deposit with the bank as collateral for such loan. The
Certificates earns a 5% interest. The loan is also secured by certain officers'
and directors', personal guarantees and the Company's inventory. This is also a
90 day note which becomes due September 22, 1996 and has been renewed
successively since March 1996.
On June 30, 1996, the Company had working capital of $3,053,564, as
compared to a working capital of approximately $1,724,852 at December 31, 1995.
Included in the working capital is a $1,100,000 which has been deposited with
the bank as collateral for the above described loans. The working capital
increase is due to the Company's sale of long term debt offset in part by a
decrease in receivables compared to last year end.
As of March 31, 1996 the Company loaned $550,000 to Threshold
Communications, Inc. ("TCI"). TCI is engaged in the radio paging business. On
March 22, 1996 TCI acquired all of the assets and assumed certain liabilities of
General Communications and Electronics, Inc. ("GCE"). In connection therewith,
the Company advanced an additional $175,000 to TCI and guaranteed certain
obligations of TCI in the amount of $739,000. As a result of the transaction
with GCE, TCI, in addition to a paging transmission site which it previously
owned, became a paging reseller. TCI offers paging service primarily through
various paging carriers in the New York metropolitan area. TCI offers national
paging service through a sales and distribution agreement with Skytel. Under
this agreement, TCI pursues regional and national accounts through its present
dealer network in the Paging Service Area. As of the date hereof TCI has
approximately a 9000 person subscriber base. TCI also has the necessary
infrastructure to operate a paging operation, including but not limited to a
full service technical shop and repair facility, engineering capability,
marketing and sales force, billing and collection systems and ancillary product
support capability for paging related products. TCI has recently acquired a
paging carrier agreement with Skytel, a company that provides nationwide paging,
voice messaging and related messaging services to subscribers and others. In
addition, TCI owns a 900 megahertz FCC paging license in the Paging Service Area
and hold a long-term lease for a paging transmission site.
On November 1, 1995 the Company acquired an exclusive option to
purchase TCI in consideration of the above mentioned loans. On June 28, 1996
the Company acquired 51% of the issued and outstanding capital of TCI. See
"Item 5. Other Information."
On January 16, 1996 the Company consummated a Private Placement of 69,460
shares of its Common Stock $.05 par value at a price of $2.25 per share. The
total offering resulted in gross proceeds of $156,217.50. Each subscriber, in
addition to the shares received, demand registrations rights, which require the
Company to file a Registration Statement upon request of 25% or more of the
shares sold in the offering at anytime during the 18 month period commencing 30
days from the closing date. In March 1996, the subscribers demanded that the
Company file a Registration Statement covering their shares. The Company at that
time was unable to comply with the request. In order to avoid a potential
litigation for failing to file a Registration Statement on a timely basis, the
Company issued an aggregate of 34,715 additional shares to the subscribers.
In light of the fact that the Company did not raise sufficient monies in
the above described Private Placement and had significant capital restricted
because of its deposit with the FCC and its collateral with its bank , the
Company was compelled on February 29, 1996, to
<PAGE>
borrow $134,000 from another unrelated corporation. Interest is payable at the
rate of 10% in monthly installments of $1,117 per month. As additional
consideration, the Company issued to the corporation 800,000 A Warrants with 90
day registration rights and "piggy back" registration rights.
On March 21, 1996, the Company entered into a letter of intent with an
investment banking firm (the "Placement Agent") Pursuant to which the Company
will offer $6,000,000 principal amount of the Company's Subordinated Convertible
Debenture (the "Debenture"). The principal amount of the Debentures shall be
convertible into shares of the Company's common stock at the option of the
holder, immediately upon issuance at a price equivalent to 25% discount from the
average high closing bid price for five days prior to the conversion or $1.50,
whichever is less. The Debenture bears interest at the rate of 5% per annum
payable on April 1 of each year commencing April 1, 1997. The Debentures are
redeemable and callable for conversion under certain circumstances. The
Debentures are also secured by certain officers and directors personal
guarantees.
The Company has agreed to pay the Placement Agent a placement fee equal to
10% of the gross proceeds, a 2% non-accountable expense allowance, issue 200,000
Warrants to purchase the Company's common stock at $2.25 per share, and issue
1,350,000 Class A Warrants. The Company intends to use the proceeds of this
offering to increase its deposit in the PCS auction, and general working capital
purposes. As of June 30, 1996 the Company has received gross proceeds from this
offering of $2,715,000.
On May 8, 1996, the Company won six PCS licenses. The total winning bids
amounted to $26,452,200, after the 25% discount provided to small businesses,
which the Company qualifies for, under the terms of the auction. The Company has
deposited $1,.000,000 with the FCC and will pay an additional $1,645,220 or an
aggregate of 10% of the winning bids upon the grant of the license, which is
anticipated very shortly. The Company will use a portion of the proceeds of the
above described offering to pay the balance of the deposit.
The Company is seeking additional financing in the form of equipment
leasing, debt or equity financing utilization of vendor financing and joint
venture partners for the purchase of PCS equipment and for build-out of
infrastructure. There can be no assurance that such financing will be available
to the Company or if available, available upon acceptable terms.
IMPACT OF INFLATION
The Company is subject to normal inflationary trends and anticipates that
any increased costs would be passed on to its customers.
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 4, 1996 the Company commenced an action entitled
Electronics Communications Corp. as Plaintiff against Toshiba America Consumer
Products, Inc. ("Toshiba") and Audiovox Corporation, case number 96 Civ. 1565 in
the United States District Court, Southern District of New York. The complaint
asserts claims for antitrust, breach of contract, tortious interference with
contract and tortious interference with prospective economic advantage and
business relations. The complaint seeks damages in excess of $5,000,000. This
action was commenced because the Company expended significant monies and
resources including the issuance of 200,000 shares of the Company's Common Stock
to a consultant in anticipation of a South American cellular telephone program
which the Company was to undertake exclusively on behalf of Toshiba. Immediately
prior to the commencement of the program, Toshiba discontinued manufacturing the
line of cellular telephones that the program was designed to offer. This
unilateral decision has caused significant damages to the Company and the
Company will vigorously prosecute this claim.
ITEM 2: CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
On May 8, 1996, the Company's wholly owned subsidiary, Personal
Communications Network, Inc. won six Personal Communications Services ("PCS")
licenses entitling the Company to operate wireless PCS telephone systems
covering nearly 1.5 million people in three states.
The licenses were won in the recently concluded Federal Communication
Commissions ("FCC") "C" Block Auction. The markets awarded the Company include
Elmira-Corning, New York; Bangor/Lewiston - Auburn/Waterville-Augusta, Maine;
and Burlington /Rutland- Bennington, Vermont. The Vermont markets encompass
virtually the whole state. The Maine markets cover a majority of the population
and most of the state geographically.
7
<PAGE>
The Company's total winning bids amounted to $26,452,200, after the 25%
discount provided to small businesses, which the Company qualifies for, under
the terms of the auction. The Company has deposited $1,000,000 with the FCC and
will pay an additional $1,645,220 or an aggregate of 10% of the winning bids
upon the grant of the license, which is anticipated very shortly.
The remaining balance will be paid out over the next 10 years with
interest only during the first six years.
On June 28, 1996, the Company completed the acquisition of 51% of the
issued and outstanding stock of Threshold Communications, Inc. ("TCI") for an
aggregate purchase price of $1,114,000. Previously, the Company loaned TCI an
aggregate of $725,000, which in addition to 194,500 shares of the Company's
Common Stock (at the time was $2.00 per share) represented the consideration
paid by the Company. TCI is a recently formed corporation engaged in the radio
paging business. TCI has recently acquired a paging subscriber base, associated
paging hardware and a paging carrier agreement with Skytel, a company that
provides nationwide paging, voice messaging and related messaging services to
subscribers and others. In addition, TCI owns a 900 megahertz FCC paging license
in the Paging Service Area and holds a long-term lease for a paging transmission
site.
On March 22, 1996 TCI acquired substantially all of the assets and assumed
certain liabilities of General Communications and Electronics, Inc. ("GCE"). As
part of the transaction with GCE, TCI, became a paging reseller with a
subscriber base of approximately 9,000 persons. TCI offers paging service
primarily through various paging carriers in the New York metropolitan area. TCI
offers national paging service through a sales and distribution agreement with
Skytel. Under this agreement, TCI pursues regional and national accounts through
its present dealer network in the Paging Service Area. TCI also has the
necessary infrastructure to operate a paging operation, including but not
limited to a full service technical shop and repair facility, engineering
capability, marketing and sales force, billing and collection systems and
ancillary product support capability for paging related products.
On March 21, 1996, the Company entered into a letter of intent with an
investment banking firm (the "Placement Agent"). Pursuant to which the Company
will offer $6,000,000 principal amount of the Company's Subordinated Convertible
Debenture (the "Debenture"). The principle amount of the Debentures shall be
convertible into shares of the Company's common stock at the option of the
holder, immediately upon issuance, at a price equivalent to 25% discount from
the average high closing bid price for five days prior to the conversion or
$1.50, whichever is less. The Debenture bears interest at the rate of 5% per
annum payable on April 1 of each year commencing April 1, 1997. The Debentures
are redeemable and callable for conversion under certain circumstances. The
Company has agreed to the Placement Agent a placement fee equal to 10% of the
gross proceeds, a 2% non-accountable expense allowance and to issue 200,000
Warrants to purchase the Company's common stock at $2.25 per share. As of the
date hereof, the Company has sold an aggregate of $2,715,000 of the Debentures.
Such proceeds were received by the Company in two tranches. The Placement Agent
has advised the Company that it has temporarily concluded offering the
debentures and will start a new offering
8
<PAGE>
on or about July 1, 1996. The Company has used the proceeds of this offering pay
its downpayment for the licenses it won in the recently concluded PCS auction,
build out its paging system and general working capital purposes.
In May, 1996 the Company sold an aggregate of 500,000 shares of its Common
Stock for $625,000 or $1.25 per share. The Company received net proceeds from
this sale of $543,750. The Company utilized the proceeds generated by this
issuance of stock for general working capital purposes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 27 - Financial Data Schedule
9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Dated: August 16, 1996
ELECTRONICS COMMUNICATIONS CORP.
By: /s/ William S. Taylor
-------------------------------
William S. Taylor
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<NAME> ELECTRONICS COMMUNICATIONS CORP.
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