<PAGE>
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
September 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 November 8, 1996, there were 11,915,515 shares of Common Stock, $.05 par
value outstanding.
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
---- ----
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash $22,669 $18,000
Restricted Cash 1,100,000 1,100,000
Accounts Receivable
(Net of $60,240 and $80,987 Allowance for Doubtful
Accounts at September 30, 1996 and
December 31, 1995, respectively.) 1,308,094 2,204,789
Inventories 259,271 476,796
Bid Deposit - 1,000,000
Loan Receivable - Other 106,560 550,000
Loan Receivable - Stockholder 81,723 -
Prepaid Expenses 63,309 78,849
----------- ----------
TOTAL CURRENT ASSETS 2,941,626 5,428,434
----------- ----------
PROPERTY AND EQUIPMENT
Property and Equipment 2,135,332 335,858
Accumulated Depreciation (236,333) (75,544)
----------- ----------
NET PROPERTY AND EQUIPMENT 1,898,999 260,314
----------- ----------
OTHER ASSETS
PCS License 26,829,482 -
Paging Carrier Agreement 968,387 -
Deferred Private Placement Costs 514,665 225,787
Deferred License Costs - 293,810
Security Deposits and Other Assets 185,418 38,313
Goodwill 67,347 -
Deferred Registration Costs 41,856 -
----------- ----------
TOTAL OTHER ASSETS 28,607,155 557,910
----------- ----------
TOTAL ASSETS $33,447,780 $6,246,658
----------- ----------
----------- ----------
</TABLE>
See Notes to Consolidated Financial Statements
F-1
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
---- ----
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES
Accounts Payable $1,593,093 $1,783,344
Notes Payable - Other 932,736 28,000
Notes Payable - Bank 1,155,000 1,225,000
Notes Payable - Stockholders 12,395 252,007
Current Portion of Obligations Under Capital Leases 104,834 50,244
Current Portion of Long Term Debt 1,666,489 -
Private Placement Advance - 116,223
Accrued Expenses 302,911 248,764
Customer Deposits 24,008 -
----------- ----------
TOTAL CURRENT LIABILITIES 5,791,466 3,703,582
----------- ----------
LONG TERM LIABILITIES
Long Term Debt 22,140,491 -
Obligations Under Capital Leases 396,003 78,801
----------- ----------
TOTAL LONG TERM LIABILITIES 22,536,494 78,801
----------- ----------
Minority Interest 455,482 -
STOCKHOLDERS' EQUITY
Preferred Stock, par value $.01 per share,
8,000,000 authorized, 4,000,000 Series B
Non - Voting Convertible Shares issued
and outstanding at September 30, 1996. 40,000 -
Common Stock, par value $.05 per share,
40,000,000 authorized, issued and
outstanding, 11,915,515 at September 30,
1996 and 3,003,697 at December 31, 1995. 595,776 150,186
Additional Paid-In Capital 16,105,170 5,320,629
Retained Deficit (6,050,907) (2,947,539)
Subscription Receivable (6,000,000)
Notes Receivable arising from Common Stock Purchase
Warrants Sold (25,701) (59,001)
----------- ----------
TOTAL STOCKHOLDERS' EQUITY 4,664,338 2,464,275
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $33,447,780 $6,246,658
----------- ----------
----------- ----------
</TABLE>
See Notes to Consolidated Financial Statements
F-2
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED DEFICIT
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
SALES
Electronics $561,494 $1,710,263 $2,775,490 $3,435,909
Commissions 670,595 537,538 2,986,562 1,941,601
Paging and Two Way Radio 631,390 - 631,390 -
----------- ----------- ----------- ----------
TOTAL SALES 1,863,479 2,247,801 6,393,442 5,377,510
----------- ----------- ----------- ----------
COST OF SALES
Electronics 557,494 1,430,428 2,357,228 2,787,085
Commissions 541,525 423,064 2,239,922 1,530,772
Paging and Two Way Radio 540,853 - 540,853 -
----------- ----------- ----------- ----------
TOTAL COST OF SALES 1,639,872 1,853,492 5,138,003 4,317,857
----------- ----------- ----------- ----------
GROSS PROFIT 223,607 394,309 1,255,439 1,059,653
----------- ----------- ----------- ----------
EXPENSES
Selling 624,771 158,918 1,139,465 390,341
General and Administrative 1,974,124 1,306,619 3,046,363 1,690,460
----------- ----------- ----------- ----------
TOTAL EXPENSES 2,598,895 1,465,537 4,185,828 2,080,801
----------- ----------- ----------- ----------
OPERATING LOSS BEFORE OTHER INCOME OTHER
EXPENSES AND INCOME TAXES (2,375,288) (1,071,228) (2,930,389) (1,021,148)
----------- ----------- ----------- ----------
OTHER INCOME
Minority Interest in Loss of Consolidated
Subsidiaries 15,254 - 15,254 -
Interest Income 2,500 12,203 16,600 12,203
----------- ----------- ----------- ----------
TOTAL OTHER INCOME 17,754 12,203 31,854 12,203
OTHER EXPENSES
Interest Expense 63,975 6,412 131,064 43,298
Settlement of Potential Litigation - - 73,769 -
Amortization of Bridge Financing Costs - - - 606,943
----------- ----------- ----------- ----------
TOTAL OTHER EXPENSES 63,975 6,412 204,833 650,241
----------- ----------- ----------- ----------
NET LOSS BEFORE INCOME TAXES (2,421,509) (1,065,437) (3,103,368) (1,659,186)
Income Taxes - - - -
----------- ----------- ----------- ----------
NET LOSS (2,421,509) (1,065,437) (3,103,368) (1,659,186)
RETAINED DEFICIT, BEGINNING OF PERIOD (3,643,498) (912,329) (2,947,539) -
----------- ----------- ----------- ----------
RETAINED DEFICIT, END OF PERIOD ($6,065,007) ($1,977,766) ($6,050,907) ($1,977,766)
----------- ----------- ----------- -----------
LOSS PER COMMON SHARE
PRIMARY (0.51) (0.23) (0.66) (0.35)
FULLY DILUTED (0.42) (0.19) (0.54) (0.29)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (NOTE 11)
PRIMARY 4,711,574 4,711,574 4,711,574 4,711,574
FULLY DILUTED 5,722,563 5,722,563 5,722,563 5,722,563
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE><CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss ($3,103,368) ($1,659,186)
Adjustments to Reconcile Net Loss to
Net Cash Used By Operations:
Non-Cash Advertising and Promotional Services - 1,075,000
Issue of Common Stock For Marketing Agreements 1,625,000 -
Depreciation and Amortization 76,129 636,803
Non-Cash Settlement of Potential Litigation 73,762 -
Changes in:
Accounts Receivable 640,348 (442,136)
Inventories 288,755 46,870
Prepayments 27,203 (41,825)
Accounts Payable (482,893) (1,240,120)
Accrued Expenses and Taxes Payable 53,243 (3,287)
Customer Deposits 24,008 (5,328)
Changes in assets and liabilities net of effects
from purchase of Threshold Communications, Inc.
Accounts Receivable 256,347 -
Inventory (71,230) -
Prepaid Expenses (11,663) -
Accounts Payable 292,642 -
Accrued Expenses and Taxes Payable 904 -
---------- ----------
TOTAL ADJUSTMENTS 2,792,555 25,977
---------- ----------
NET CASH USED BY
OPERATING ACTIVITIES (310,813) (1,633,209)
---------- ----------
CASH FLOWS FROM INVESTING
ACTIVITIES
Stockholder Loans Receivable (81,723) -
Notes Receivable arising from Common Stock
Purchase Warrants 33,300 -
Deferred Private Placement Costs (288,878) (108,716)
Deferred Registration Costs (41,856) -
License Costs (1,728,692) -
Additions to Property and Equipment (133,995) (40,397)
Loan Receivable - (300,000)
Payment for Purchase of Threshold
Communications, Inc., Net of Cash Acquired (180,556) -
Other Assets (147,105) (164,458)
---------- ----------
NET CASH USED BY INVESTING
ACTIVITIES (2,569,505) (613,571)
---------- ----------
CASH FLOWS FROM FINANCING
ACTIVITIES
Payments of Shareholder Loans (239,612) (31,037)
Proceeds of Other Loans 579,336 (82,000)
Payments of Bridge Loans - (800,000)
Payments of Bank Loans (70,000) (15,000)
Principal Payments Under Capital Lease Obligation (84,742) -
Sale of Common Stock 2,700,005 3,869,937
---------- ----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 2,884,987 2,941,900
---------- ----------
NET INCREASE IN CASH 4,669 695,120
CASH, BEGINNING OF PERIODS 18,000 136,203
---------- ----------
CASH, END OF PERIODS $22,669 $831,323
---------- ----------
---------- ----------
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1996 1995
---- ----
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE FOR CASH FLOWS
CASH PAID DURING THE YEAR FOR :
Interest $131,064 $36,886
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Property Acquired Under Capital Leases ($456,534) -
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<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 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 for
$26,452,200 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% if 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 nine months ended September 30, 1996 are not necessarily
F-6
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
(A) BUSINESS ACTIVITY AND BASIS OF PRESENTATION - (CONTINUED)
indicative 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 nine
months ended September 30, 1996 and 1995 was $27,125 and $29,919,
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
Company's 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.
F-7
<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
F-8
<PAGE>
NOTE 2 - ACQUISITION, RECAPITALIZATION AND PUBLIC OFFERING - (CONTINUED)
option to purchase an additional 300,000 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 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 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 purchases
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. As of September
30,1996 $2,990,000 was converted into 5,706,662 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).
(H) On September 4, 1996, the Company entered into a Client Service
Agreement with a public relations firm. Pursuant to the terms of the
agreement, the firm was hired as a financial public relations consultant to
promote the Company's business to the financial community. The term of the
agreement is for two years. In consideration of the services to be performed
by the firm, the Company issued 2,300,000 registered shares of the Company's
common stock. The above transaction resulted in a non cash expense of
$1,437,500.
F-9
<PAGE>
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
$828,769 for the sale of electronic goods, $221,333 for commissions, and
$318,232 for the sale of radio paging and two way radio service at September
30, 1996 and $1,503,303, $782,473 and $ -0- at December 31, 1995.
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. These 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 personal 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 consist of six paging licenses with various
paging carriers. The cost of such agreements are being amortized over a
fifteen year period.
(D) The PCS licenses were awarded in a Federal Communications Commissions "C"
Block Auction. The markets awarded the Company include Elmire-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. The licenses expire and are
subject to renewal after ten (10) years.
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 deposited $2,645,220 as payment for
these licenses.
The remaining balance will be paid out over the next 10 years with 7%
interest only during the first six years. Included on the license costs are
certain legal fees incurred in obtaining the license. Also included in these
costs are $7,630 of capitalized interest. The company has not begun PCS
service. Upon inception of such services, the Company will amortize the
licenses and related costs over a 10 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-Registered Trademark-, 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 an 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.
F-10
<PAGE>
NOTE 5 - LOAN RECEIVABLE - (CONTINUED)
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 2G.
On September 30, 1996 the loan receivable-other 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.
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 was fully refundable in the
event the Company was 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 (See Note 4D).
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 September 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. The balance of this loan was $109,711 at September
30, 1996.
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. The balance of this loan was $323,025 at September 30, 1996.
F-11
<PAGE>
NOTE 7 - NOTES PAYABLE - (CONTINUED)
On September 20, 1996, the Company entered into a loan agreement with a
private lender, pursuant to which the Company borrowed $500,000. The loan
bears interest at the rate of 10% per annum. The loan becomes due and
payable on or before June 20, 1997, however the Company may request an
automatic three (3) month extension on the due date. The Company used the
proceeds of this loan for general corporate purposes.
(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 Distributors,
Inc. 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 became due
and payable on April 18, 1996. At September 30, 1996 the balance on this loan
was $55,000. This note was temporally 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 the bank extended the due date 90 days. The note has
been extended until January 6, 1997.
(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 December 22, 1996.
(F) The Notes Payable-FCC consist of six 7% 10 year notes aggregating
$23,806,980. The notes are payable in quarterly installments of interest
only for the first six years and principal plus interest thereafter. The
notes are secured by the PCS licenses.
F-12
<PAGE>
NOTE 8 - CAPITAL LEASE
Capital Leases include $456,534 for equipment. Minimum future lease payments
under capital leases as of September 30, 1996 for each of the next five years
and in the aggregate are:
1996 $49,399
1997 197,597
1998 180,239
1999 155,729
2000 114,122
---------
Total Minimum Lease Payments 689,186
Less: Amount Representing Interest (188,349)
---------
Present Value of Net
Minimum Lease Payments 500,837
Less: Current Maturities
included in Current Liabilities (104,834)
---------
Long Term Obligations Under
Capital Leases $396,003
---------
---------
The interest rates on the capitalized leases range 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
September 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.
NOTE 11 - LOSS PER COMMON SHARE
The Company computes loss per common share by dividing the net loss by the
weighted average number of common stock and dilutive equivalent shares
outstanding, 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.
F-13
<PAGE>
NOTE 12 - CONVERTIBLE PREFERRED STOCK
On July 23, 1996, the Board of Directors of the Company authorized the
issuance of an aggregate of 4,000,000 shares of Series B Preferred Stock
("Preferred Stock"). Each share of Preferred Stock is valued at $1.50 per
share and convertible into 1.5 shares of the Company's Common Stock. These
shares were purchased by three (3) year Promissory Notes ("Notes") bearing
interest at the rate of 7% per annum. The interest shall accrue and not be
payable until the securities are sold. The Notes shall be immediately
extendible for additional one year terms. The Notes are non-recourse, but
collateralized by the Pledge of the Preferred Stock. Each share of Preferred
Stock is subject to a three year vesting period, whereby 1/3 was immediately
vested, and the balance to be vested during the next two years as long as the
aforementioned individuals remain as either an officer or director of the
company.
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.
F-14
<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
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 September 30, 1996 and September 30, 1995 was $109,258 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 lease
for each of the remaining years are:
1996 $ 42,722
1997 107,888
1998 107,888
1999 135,888
2000 110,888
--------
Total Minimum Future
Rental Payments $505,274
--------
--------
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.
F-15
<PAGE>
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 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. The
defendants, Toshiba and Audiovox, moved to dismiss the case, claiming that
the Company had not pled a cognizable antitrust cause of action, and that the
remaining claims should be dismissed for lack of supplemental jurisdiction.
On August 12, 1996 the Court ruled in favor of the motion of defendants
Toshiba and Audiovox and the cause was dismissed on such date. The Company
has appealed the Court's ruling and settlement negotiations are ongoing. If
an adequate settlement cannot be reached, the Company will vigorously
prosecute this claim.
NOTE 21 - PRO FORMA INFORMATION
As described in Note 2G the Company acquired 51% of TCI. The following
unaudited pro forma combines the results of operations for the nine months
ended September 30, 1996 for the acquisition. The pro forma results give
effect to the amortization of goodwill.
UNAUDITED PRO FORMA COMBINED RESULTS OF OPERATIONS
Nine Months Ended
September 30, 1996
------------------
Sales $7,528,806
Net Loss (3,254,362)
Net Loss Per Common Share ($.69)
F-16
<PAGE>
NOTE 22 - SUBSEQUENT EVENTS
On October 9, 1996, the Company entered into a loan with a Director of the
Company, pursuant to which the Company borrowed $180,000. This loan bears
interest at a rate of 10% per annum. The loan is due upon three days written
demand. The Company used the proceeds of this loan for general corporate
purposes.
On October 7, 1996 the Company entered into a consulting agreement. Pursuant
to the agreement the consulting firm is to provide financial consulting and
advisory services to the Company and its subsidiary PCN, including, without
limitation, general advice with respect to financing, acquisition, joint
venture or other corporate transactions. In consideration of the services to
be rendered PCN is issuing to the consulting firm or its designees ten shares
of its common stock representing an aggregate of 10% of the issued and
outstanding shares of PCN.
F-17
<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 SEPTEMBER 30, 1996 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1995
During the three months ended September 30, 1996 revenues from sales
decreased $384,322 or 17% compared to the same period in 1995. The reduction
in sales was primarily due to a decrease in Electronic equipment sales
($1,148,769) offset in part by the initial sales in the Company's Paging and
Two-Way Radio operations in the amount of $631,390 for the three months ended
September 30, 1996. This result reflects the new focus of the Company's
business, which is moving away from being an Electronics distributor to that
of a telecommunications carrier and cellular agent. Activation commissions
and residual income increased during the period by approximately $133,057 or
approximately 67% and 25% respectively. The increase in commissions was due
to increased activation's 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 decreased $872,934 compared to the same
period in 1995, as a result of lower overall sales of electronic equipment.
Gross profit from electronics equipment sales decreased approximately 15% from
16% to 1% during the same period in 1996. The decrease in gross profit was due
to the Company liquidating certain product lines as part of the Company's
overall new business strategy. 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 $118,461
compared to the same period in 1995, due to an increase in revenues. The gross
profit percentage related to these sales decreased approximately 2%, from 21%
for the three months ended September 30, 1995 to 19% for the three months ended
September 30, 1996 as a result of a shift to greater sales through the Company's
own direct sales efforts.
Selling expenses increased approximately $465,853 for the three months
ended September 30, 1996 as compared to the same period in 1995 due to increased
advertising relating directly to the Company's new Paging and Two-Way Radio
operations, which both began operating during the quarter ended September 30,
1996. General and administrative expenses increased approximately $667,505 for
the three months ended September 30, 1996 as compared to the same period in
1995. This increase is related to the Company entering into a Client Service
Agreement with a public relations firm. In consideration of the services to be
performed by the firm, the Company issued 2,300,000 shares of the Company's
Common Stock. This transaction resulted in a non cash expense of $1,437,500.
This increase was further impacted by 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 $2,375,288 for the three months ended September 30, 1996 compared to a loss
of $1,071,228 for the three months ended September 30, 1995.
Interest expenses increased approximately $57,563 compared to the same
period in 1995 as a result of increased borrowing by the Company.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1995
During the nine months ended September 30, 1996 revenues from sales
increased approximately $1,015,932 or 19% compared to the same period in 1995.
Electronic equipment sales decreased approximately $660,419, as a result of the
Company's new focus, from being an Electronics' distributor to that of a
telecommunications carrier and cellular agent. The Company will continue to
sell cellular telephones. Activation commissions and residual income increased
during the period by approximately $1,044,961 or approximately 19% and 54%
respectively. The increase in commissions was due to increased activation 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. The
results for the nine months ended September 30,1996 includes sales from the
Company's Paging and Two-Way Radio operations in the amount of $631,390 which
occurred during the three months ended September 30, 1996.
Cost of electronic equipment sales decreased $429,857 compared to the same
period in 1995, as a result of lower overall sales of electronic equipment.
Gross profit from electronics equipment sales decreased approximately 4% from
19% to 15% during the same period in 1996. The decrease in gross profit was due
to the Company liquidating certain product lines during the third quarter of
1996, as part of the Company's overall business strategy. 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 $709,150
compared to the same period in 1995, due to an increase in revenues. The gross
profit percentage related to these sales increased approximately 4% from 21% for
the nine months ended September 30, 1995 versus 21% for the nine months ended
September 30, 1996 as a result of relatively greater direct sales.
Selling expenses increased approximately $749,124 for the nine months
ended September 30, 1996 as compared to the same period in 1995 due to
increased advertising relating directly to the Company's new Paging and
Two-Way Radio operations, which both began operation during the quarter ended
September 30, 1996. General and administrative expenses increased
approximately $1,355,903 for the nine months ended September 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 the issuance of 2,300,000 shares of the
Company's Common Stock to a public relations firm, which resulted in a
non-cash expense of $1,437,500 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 $2,930,389 for the nine months ended September 30, 1996
compared to a loss of $1,021,148 for the nine months ended September 30, 1995.
Interest expenses increased approximately $87,766 compared to the same
period in 1995 as a result of increased borrowing by the Company.
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 October 1996 Mr. William S.
Taylor and Mr. Les Winder loaned the Company $40,000 and $22,000 respectively.
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
September 30, 1996, there was an outstanding balance under this loan of $55,000
with interest payable monthly at the rate of 1.5% per annum in excess of the
bank's fluctuating prime lending rate. As of September 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 September 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.
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
September 30, 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 Certificate earns 5% interest. The loan is also secured by certain
officers' and directors' personal guarantees and the Company's inventory. There
is also a 90 day note which becomes due on December 22, 1996 and has been
renewed successively since March 1996.
On September 30, 1996, the Company had working capital deficit of
$2,849,840, as compared to a working capital of approximately $1,724,852 at
December 31, 1995. Included in the working capital is $1,100,000 which has
been deposited with the bank as collateral for the above described loans. The
working capital decrease is due in part to the Company's purchase of PCS
licenses and the Installment Notes the Company was required to enter into as
part of the purchase. The current portion of these notes is equal to
$1,666,489, as well as other borrowing related to such acquisitions. The PCS
licenses are classified as Other Assets and not Current Assets. Accordingly,
the increased borrowing relating to the purchase of PCS licenses and the
classification of the PCS licenses as Other Assets has a direct effect on the
Company's working capital.
As of September 30, 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 7,500 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. A principal
stockholder of TCI was a stockholder of the Company at the time of these
transactions.
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.
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 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 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
offered $6,000,000 principal amount of the Company's Subordinated Convertible
Debenture (the "Debenture"). The principal amount of the Debentures was
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 were
redeemable and callable for conversion under certain circumstances. The
Debentures were also secured by certain officers and directors personal
guarantees.
The Company 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 sold an aggregate of $2,990,000 of the
Debentures, at which point the Company and the Placement Agent mutually agreed
to discontinue the offering. The proceeds of this offering were used by the
Company to pay its down payment for the PCS licenses it won in the recently
concluded PCS auction, build out its paging system and general working capital
purposes. As of September 30, 1996, all $2,990,000 principal amount of the
Debentures has converted into an aggregate of 5,706,822 shares of the Company's
Common Stock.
On May 22, 1996 the Company sold an aggregate of 500,000 shares of its
Common Stock for $625,000 or $1.25 per share to three unrelated parties. On May
22, 1996 the Company's Common Stock was trading at $2.00 per share as reported
by NASDAQ. The Company sold the stock at a discount to market due to the fact
the stock was restricted, and the large quantity of shares made the stock
relatively illiquid in comparison to the Company's average daily volume prior to
May 22, 1996. 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.
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 $2,645,220 with the FCC which equals 10% of the cost of the
license. The Company used a portion of the proceeds of the above described
offering to pay the deposit.
On October 9, 1996 the FCC officially awarded the six PCS licenses to the
Company. In connection therewith, the Company entered into six separate
Installment Payment Plan Notes ("Plan Notes") with the FCC in the aggregate
amount of $23,807,009. Interest only is due commencing December 31, 1996, in
equal consecutive quarterly installments of $416,622.67 ($1,666,490.70 annually)
until September 30, 2002. Commencing December 31, 2002, the Company shall pay
principal and interest in equal quarterly installments of $1,718,855.80
($6,875,423.20 annually) until September 30, 2006 ("Maturity Date").
The entire unpaid Principal Amount, together with accrued and unpaid
interest on the Plan Notes and all remaining obligations thereunder, shall be
due and payable on the Maturity Date.
On September 20, 1996, the Company entered into a loan agreement with the
Marrotta Group (the "Lender"), pursuant to which the Company borrowed $500,000.
The loan bears interest at the rate of 10% per annum. The loan becomes due and
payable on or before June 20, 1997, however, the Company may request an
automatic three (3) month extension on the due date. As additional
consideration for making the loan, the Company agreed to issue to Lender 200,000
shares of the Company's common stock and 400,000 Class A warrants, each with
demand and piggy back registration rights. The Company used the proceeds of
this loan for general corporate purposes.
On October 9, 1996, the Company entered into a loan with Robert DePalo, a
Director of the Company, pursuant to which the Company borrowed $180,000. This
loan bears interest at the rate of 10% per annum. The loan is due upon three
days written demand. The Company used the proceeds of this loan for general
corporate purposes.
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, build-out of infrastructure
and payment of the Plan Notes. 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.
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 ("Audiovox"),
case number 96 Civ. 1565 in the United States District Court, Southern
District of New York. The complaint asserted claims for antitrust, breach of
contract, tortious interference with contract and tortious interference with
prospective economic advantage and business relations. The complaint sought
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 caused significant damages to the Company. The defendants Toshiba
and Audiovox moved to dismiss the case, claiming that the Company had not
pled a cognizable antitrust cause of action, and that the remaining claims
should be dismissed for lack of supplemental jurisdiction. On August 12,
1996 the Court ruled in favor of the motion of defendants Toshiba and
Audiovox and the cause was dismissed on such date. The Company has appealed
the Court's ruling and settlement negotiations are ongoing. If an adequate
settlement cannot be reached, the Company will continue to 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
The Company's Annual Meeting of Stockholders was held on November 7,
1996, pursuant to written notice. The total number of the Company's shares
outstanding on November 7, 1996, the record date of the meeting, was 11,915,515,
of which 9,396,968 were present, in person or by proxy. The following persons
were nominated by management and each was elected to serve as director until the
next annual meeting of stockholders:
William S. Taylor
Les Winder
Brenda Taylor
Robert DePalo
Mal Gurian
Ira J. Tabankin
The following matters were submitted to stockholders and adopted by the
requisite vote of a majority of the shares present at the meeting or a majority
of the votes cast on the particular matter.
FOR AGAINST ABSTAINED
To ratify the selection
of auditors ........... 9,295,456 54,266 47,246
To ratify the purchase
by certain officers and
directors of 4 million
shares of Series B
Preferred Stock........ 1,673,228 425,496 156,542
ITEM 5. OTHER INFORMATION
On July 23, 1996, the Board of Directors of the Company authorized the
issuance, subject to shareholder ratification, of an aggregate of 4,000,000
shares of Series B Preferred Stock ("Preferred Stock"). William S. Taylor,
President, CEO and Chairman of the Board, Les Winder, Executive Vice President
and Director, Brenda Taylor, Secretary and Director and Robert DePalo, Director
each acquired 1,000,000 shares of such Preferred Stock. Each share of Preferred
Stock is valued at $1.50 per share and convertible into 1.5 shares of the
Company's Common Stock. These individuals were given the right to buy these
shares in return for their respective personal guarantees of approximately
$3,0000,000 and certain other financial accommodations provided to the Company.
These shares were purchased by three (3) year Promissory Notes ("Notes") bearing
interest at the rate of 7% per annum. The interest shall accrue, and not be
payable until the securities are sold. The Notes shall be immediately
extendible for additional one year terms.
The Notes are non-recourse, but collateralized by the Pledge of the
Preferred Stock. Each share of Preferred Stock is subject to a three year
vesting period, whereby 1/3 was immediately vested, and the balance to be vested
during the next two years as long as the aforementioned individuals remain as
either an officer or director of the Company. The Shareholders ratified this
transaction at the Annual Meeting of Shareholders on November 7, 1996.
On October 29, 1996 the Company's wholly owned subsidiary, Personal
Communications Network, Inc. ("PCN") entered into a strategic partnership with
NextWAVE Telecom Inc. ("NextWAVE"). Under the terms of the 10 year strategic
resale agreement, PCN will sell a variety of wireless PCS services nationwide,
except the New York Metropolitan area. The agreement provides for PCN to
purchase 5 million minutes of use ("MOU"), and resell such MOU's at a profit.
By reselling wireless minutes on NextWAVE's PCS network, PCN will in
management's opinion be able to offer high quality mobile communications
services to small businesses and customers in major markets throughout the
United States.
On September 20, 1996, the Company entered into a loan agreement with the
Marrotta Group (the "Lender"), pursuant to which the Company borrowed $500,000.
The loan bears interest at the rate of 10% per annum. The loan becomes due and
payable on or before June 20, 1997, however, the Company may request an
automatic three (3) month extension on the due date. As additional
consideration for making the loan, the Company agreed to issue to Lender 200,000
shares of the Company's common stock and 400,000 Class A warrants, each with
demand and piggy back registration rights. The Company used the proceeds of
this loan for general corporate purposes.
On October 9, 1996, the Company entered into a loan with Robert DePalo, a
Director of the Company, pursuant to which the Company borrowed $180,000. This
loan bears interest at the rate of 10% per annum. The loan is due upon three
days written demand. The Company used the proceeds of this loan for general
corporate purposes.
On September 4, 1996, the Company entered into a Client Service Agreement
with Great Deals, Inc. ("Great Deals"). Pursuant to the terms of the agreement,
Great Deals was hired as a financial public relations consultant, to promote the
Company's business to the financial community. The term of the agreement is for
two years. In consideration of the services to be performed by Great Deals, the
Company issued 2,300,000 shares of the Company's common stock to Great Deals.
In addition, the Company registered these shares on an S-8 Registration
Statement.
On October 7, 1996 the Company entered into a consulting agreement with
Emerging Growth Technologies, Inc. ("EGT"). Pursuant to the agreement EGT is to
provide financial consulting and advisory services to the Company and its
subsidiary PCN, including, without limitation, general advice with respect to
financing, acquisition, joint venture or other corporate transactions.
In consideration of the services rendered and to be rendered PCN is issuing
to EGT or its designees ten shares of its common stock representing an aggregate
of 10% of the issued and outstanding shares of PCN.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 3.1 - Certificate of Designation dated October 23, 1996
Exhibit 10.1 - Form of Promissory Note - Purchase of Series B
Preferred Stock
Exhibit 10.2 - Form of Pledge - Purchase of Series B Preferred Stock
Exhibit 10.3 - Loan Agreement dated September 20, 1996 between
the Marrotta Group and the Company
Exhibit 10.4 - Loan Agreement dated October 9, 1996 between Robert
DePalo and the Company
Exhibit 10.5 - Client Service Agreement dated September 4, 1996
between Great Deals Inc. and the Company
Exhibit 10.6 - Consulting Agreement dated October 7, 1996 between
Emerging Growth Technologies, Inc. and the Company
Exhibit 27 - Financial Data Schedule
<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: November 15, 1996
ELECTRONICS COMMUNICATIONS CORP.
By: /S/ WILLIAM S. TAYLOR
------------------------------
William S. Taylor
<PAGE>
EXHIBIT 3.1
<PAGE>
CERTIFICATE OF DESIGNATION
OF
ELECTRONICS COMMUNICATIONS CORP.
UNDER SECTION 151 OF THE DELAWARE GENERAL CORPORATION LAW, ELECTRONICS
COMMUNICATIONS CORP., a Delaware corporation (the "Corporation") certifies as
follows:
FIRST: Under the authority contained in Article FOURTH of the
Certificate of Incorporation of the Corporation, as amended, the Board of
Directors of the Corporation has classified 4,000,000 of the authorized but
unissued shares of Preferred Stock, $.01 par value, of the Corporation as shares
of "Series B Preferred Stock."
SECOND: The following resolution was duly adopted by the Board of
Directors of the Corporation on September 30, 1996, and such resolution has not
been modified and is in full force and effect on the date hereof:
RESOLVED, that the Board of Directors hereby creates and classifies, from
the authorized but unissued shares of preferred stock of the Corporation, $0.01
par value, (hereinafter the "preferred stock"), a series of 4,000,000 shares of
Preferred Stock, $0.01 par value, and hereby fixes the voting powers,
designations, preferences and relative, participating, optional or other special
rights, and the qualifications, limitations or restrictions thereof, of the
shares of such series, in addition to those set forth in the Certificate of
Incorporation as follows:
(a) DESIGNATION. The designation of the series of Preferred Stock created
by this resolution shall be "Series B Preferred Stock" (hereinafter the "Series
B Preferred Stock"). The number of authorized shares constituting the Series B
Preferred Stock shall be 4,000,000. The number of authorized shares of Series B
Preferred Stock may be increased or reduced by further resolution duly adopted
by the Board of Directors and by the filing of a certificate pursuant to the
provisions of the General Corporation Law of the State of Delaware stating that
such increase or reduction has been so authorized.
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(b) VOTING. The holders of shares of Series B Preferred Stock shall not
be entitled to any notice of meetings of stockholders nor any vote, except as
required by the Delaware General Corporation Law.
(c) LIQUIDATION RIGHTS.
(1) Upon the dissolution, liquidation or winding up of the Corporation,
the holders of the shares of Series B Preferred Stock shall be
entitled to receive and to be paid out of the assets of the
Corporation available for distribution to its stockholders, before any
payment or distribution shall be made on the Common Stock or any other
class of capital stock ranking junior to the Series B Preferred Stock
upon such liquidation, dissolution or winding up, an amount equal to
$0.01 per share of Series B Preferred Stock.
(2) After the payment to the holders of the shares of Series B Preferred
Stock of the full preferential amounts provided for in Paragraph
(c)(1), the holders of the Series B Preferred Stock as such shall not
be entitled to receive any additional distribution.
(3) In the event the assets of the Corporation available for distribution
to the holders of shares of Series B Preferred Stock upon any
dissolution, liquidation or winding up of the Corporation, whether
voluntary or involuntary, shall be insufficient to pay in full all
amounts to which such holders are entitled pursuant to Paragraph
(c)(1) above, no such distribution shall be made on account of any
shares of any other class or series of capital stock of the
Corporation ranking on a parity with the shares of this Series upon
such dissolution, liquidation or winding up unless proportionate
distribution amounts shall be paid on account of the shares of Series
B Preferred Stock, ratably, in proportion to the full distributable
amounts for which holders of all such parity shares are respectively
entitled upon such dissolution, liquidation or winding up.
(d) CONVERSION. Each share of Series B Preferred Stock shall be
convertible at any time after November 1, 1996 (which date shall be set forth in
a certificate filed pursuant to Section 103(f) of the General Corporation Law)
at the option of the holder thereof into one and one-half (1.5) shares of Common
Stock (the "Conversion Rate").
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<PAGE>
The Conversion Rate shall be subject to adjustment from time to time in
certain instances as hereinafter provided, except that no adjustment shall be
made unless by reason of the happening of any one or more of the events
hereinafter specified, the Conversion Rate then in effect shall be changed by
20% or more, but any adjustment of less than 20% that would otherwise be
required then to be made shall be carried forward and shall be made at the time
of and together with any subsequent adjustment which, together with any
adjustment or adjustments so carried forward, amounts to 20% or more.
Before any holder of shares of Series B Preferred Stock shall be entitled
to convert the same into Common Stock, he shall surrender the certificate or
certificates for such shares of Series B Preferred Stock to the Corporation
during regular business hours, at the office of any transfer agent of the
Corporation for the Series B Preferred Stock, or at the Principal office of the
Corporation or at such other place as may be designated by the Corporation,
which certificate or certificates, if the Corporation shall so request, shall be
duly endorsed to the Corporation or in blank, or accompanied by proper
instruments of transfer to the Corporation or in blank, and shall give written
notice to the Corporation that he elects so to convert said shares of Series B
Preferred Stock, and shall state in writing therein the name or names in which
he wishes the certificate or certificates for Common Stock to be issued.
The Corporation will, as soon as practicable after such surrender of
certificates for shares of Series B Preferred Stock accompanied by the written
notice and the statement above prescribed, issue and deliver at the office
appointed as aforesaid, to the person for whose account such Series B Preferred
Stock was so surrendered, or to his nominee or nominees, certificates for the
number of full shares of Common Stock to which he shall be entitled as
aforesaid, together with a cash adjustment for any fraction of a share as
hereinafter stated, if not evenly convertible. Subject to the following
provisions of this paragraph, such conversion shall be deemed to have been made
as of the date such surrender of Series B Preferred Stock to be converted was
duly made and the person or persons entitled to receive the Common Stock
issuable upon conversion of such Series B Preferred Stock shall be treated for
all purposes as the record holder or holders of such Common Stock on such date.
The Corporation shall not be required to convert, and no surrender of Series B
Preferred Stock shall be effective for that purpose, while the stock transfer
books of the Corporation are closed for any purpose; but the surrender of Series
B Preferred Stock for conversion during any period while such books are so
closed shall become effective for conversion immediately upon the reopening of
such books, as if the conversion had been made on the date such Series B
Preferred Stock was surrendered, and at the Conversion Rate in effect at the
date of such surrender.
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The Conversion Rate shall be subject to adjustment from time to time as
follows, regardless of whether or not such Series B Preferred Stock is
outstanding at the time;
(1) STOCK DIVIDENDS, SUBDIVISION, COMBINATIONS. If the Corporation
shall at any time (a) take a record of the holders of its Common Stock
for the purpose of entitling them to receive a dividend payable in, or
other distribution of, Common Stock; (b) subdivide its outstanding
shares of Common Stock into a larger number of shares of Common Stock;
or (c) combine its outstanding shares of Common Stock, the Conversion
Rate in effect immediately prior thereto shall be adjusted so that
each share of Series B Preferred Stock shall thereafter be convertible
into the number of shares of Common stock which the holder of such
shares of Series B Preferred Stock would have been entitled to receive
after the happening of any of the events described above had such
share been converted immediately prior to the happening of such event.
An adjustment made pursuant to this subparagraph (1) shall become
effective retroactively to the record date in the case of a dividend
and shall become effective on the effective date in the case of a
subdivision or combination.
(2) REORGANIZATION, RECLASSIFICATION, MERGER, CONSOLIDATION OR CONVEYANCE
OF ASSETS. In case of any capital reorganization or any
reclassification of the capital stock of the Corporation or in case of
the consolidation or merger of the Corporation with or into another
corporation or in the case of any sale or conveyance of all or
substantially all of the property, assets or business of the
Corporation, each share of Series B Preferred Stock shall thereafter
be convertible into the number of shares of stock or other securities
or property receivable upon such capital reorganization,
reclassification of capital stock, consolidation, merger, sale or
conveyance, as the case may be, by a holder of the number of shares of
Common Stock into which such shares of Series B Preferred Stock was
convertible immediately prior to such capital reorganization,
reclassification or capital stock consolidation, merger, sale or
conveyance; and, in any case, appropriate adjustment (as reasonably
determined in good faith by the Board of Directors of the Corporation)
shall be made in the application of the provisions herein set forth
with respect to the rights and interests thereafter of the holders of
the Series B Preferred Stock to the end that the provisions set forth
herein (including the specified changes in and other adjustments of
the Conversion Rate) shall
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<PAGE>
thereafter be applicable, as nearly as reasonably may be, in relation
to any shares of stock or other securities or other property
thereafter deliverable upon the conversion of the Series B Preferred
Stock.
(3) OTHER ACTION AFFECTING CAPITAL STOCK. In case at any time or from
time to time the Corporation shall take any action affecting its
capital stock, other than an action described in any of the foregoing
subparagraphs (1) and (2), then, unless the Board of Directors of the
Corporation reasonably determines in good faith that such action will
not have a material adverse effect upon the rights of the holders of
the Series B Preferred Stock, the Conversion Rate shall be adjusted in
such manner and at such time as the Board of Directors of the
Corporation may reasonably and in good faith determine to be equitable
in the circumstances.
(4) CERTIFICATE OF ADJUSTMENT. Whenever the Conversion Rate is adjusted
as herein provided, the Corporation shall forthwith file with any
transfer agent for the Series B Preferred Stock appointed as aforesaid
a certificate, signed by the President or one of the Vice Presidents
of the Corporation and by its Treasurer or any Assistant Treasurer,
stating the adjusted Conversion Rate determined as provided in this
paragraph. Such certificate shall show in detail the facts requiring
such adjustment. Whenever the Conversion Rate is adjusted, the
Corporation will forthwith cause a notice stating the adjustment and
the Conversion Rate as adjusted to be mailed to the holders of Series
B Preferred Stock. Such transfer agent shall be under no duty to make
any inquiry or investigation as to the statements contained in any
such certificate or as to the manner in which any computation was
made, but may accept such certificate as conclusive evidence of the
statements therein contained, and such transfer agent shall be fully
protected with respect to any and all acts done or actions taken or
suffered by it in reliance thereof. No transfer agent in its capacity
as transfer agent shall be deemed to have any knowledge with respect
to any change of capital structure of the Corporation unless and until
it receives a notice thereof pursuant to the provisions of this
subparagraph (4) and in default of any such notice such transfer agent
may conclusively assume that there has been no such change.
(5) RESERVATION OF COMMON STOCK. The Corporation shall at all times
reserve and keep available out of its authorized and unissued Common
Stock, solely for the purpose of affecting the conversion of the
Series B Preferred Stock, such number
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<PAGE>
of shares as shall from time to time be sufficient to effect the
conversion of all shares of Series B Preferred Stock from time to
time outstanding. The Corporation shall from time to time, in
accordance with the General Corporation Law of the State of Delaware,
increase the authorized amount of its Common Stock if at any time the
number of shares of Common Stock remaining unissued shall not be
sufficient to permit the conversion of all the then outstanding
Series B Preferred Stock.
(6) SETTLEMENT OF FRACTIONAL SHARES. No fractional shares of Common Stock
are to be issued upon conversion of the Series B Preferred Stock, but
in lieu thereof the Corporation will pay therefor in cash based on the
fair market value (as reasonably determined in good faith by the Board
of Directors of the Corporation) of the Common Stock on the business
day immediately preceding the day of conversion.
(7) TAXES. The Corporation will pay any and all issue and other taxes
(other than taxes based on income) that may be payable in respect of
any issue or delivery of shares of Common Stock on conversion of
shares of Series B Preferred Stock. The Corporation shall not,
however, be required to pay any tax which may be payable in respect of
any transfer involved in the issue and delivery of Common Stock in a
name other than that in which the shares of Series B Preferred Stock
so converted were registered, and no such issue or delivery shall be
made unless and until the person requesting such issue has paid to the
Corporation the amount of any such tax, or has established, to the
satisfaction of the Corporation, that such tax has been paid.
Shares of Series B Preferred Stock which are converted into Common
Stock shall have the status of retired shares and shall not be
available for reissuance.
Shares of Common Stock shall not be convertible into any other
securities of the Corporation.
(e) RANKING. For purposes of this resolution, no capital stock of any
class or series shall be deemed to rank prior to the shares of
Series B Preferred Stock upon any liquidation, dissolution or winding
up of the Corporation. Any capital stock of any class or series of
the Corporation shall be deemed to rank as follows:
6
<PAGE>
(1) on a parity with shares of Series B Preferred Stock upon the
liquidation, dissolution or winding up of the Corporation, as the case
may be, if the holders of such capital stock shall be entitled to the
receipt of amounts distributable upon such liquidation, dissolution or
winding up in proportion to their respective liquidation prices,
without preference or priority, one over the other, as between the
holders of such capital stock and holders of the Series B Preferred
Stock.
(2) junior to shares of Series B Preferred Stock upon such liquidation,
dissolution or winding up (the "Junior Stock"), if such capital stock
shall be Common Stock, or if the holders of the shares of Series B
Preferred Stock shall be entitled to the receipt of amounts
distributable upon such liquidation, dissolution or winding up of the
Corporation in preference or priority to the holders of shares of such
capital stock.
(f) NO OTHER RIGHTS. The shares of Series B Preferred Stock shall not
have any relative, participating, optional or other special rights
and powers other than as set forth above in this certificate of
Designation and the Certificate of Incorporation.
[SIGNATURE PAGE FOLLOWS]
7
<PAGE>
IN WITNESS WHEREOF, Electronics Communications Corp. has caused its
corporate seal to be hereunto affixed and this Certificate to be signed by its
President, William Taylor, and attested by its Secretary, Brenda Taylor, this
22nd day of October 1996.
ELECTRONICS COMMUNICATIONS CORP.
[CORPORATE SEAL]
By: /s/ William Taylor
-------------------------------
William Taylor, President
ATTEST:
/s/ Brenda Taylor
- -----------------------------
Brenda Taylor, Secretary
8
<PAGE>
PROMISSORY NOTE
$1,500,000 JULY ___, 1996
FOR VALUE RECEIVED, the undersigned, _____________________,
________________________(the "Maker"), does hereby promise to pay to the
order of ELECTRONICS COMMUNICATIONS CORP., at 10 Plog Road, Fairfield, New
Jersey 07004, or such other place in the United States as may be designated
by the holder of this note, (the "Holder") the principal sum of One Million
Five Hundred Thousand ($1,500,000.00) Dollars (the "Principal") together with
interest at the rate of seven percent (7%) per annum.
Principal and interest shall be due on July 30, 1999. This Note shall
automatically be renewed for an additional one year term if the Note is not
paid off at maturity.
The Maker having deposited with the holder as collateral security for
the payment of this note the following property:
1,000,000 shares of Series B Preferred Stock of Electronics
Communications Corp.
The Maker may pre-pay the Principal in whole or in part at any time or
times, without penalty.
Upon any Default hereunder, the Maker and any signer, guarantor or
endorser hereof shall pay all costs of collection, including attorneys' fees,
whether or not suit is commenced, paid or incurred in enforcing this Note and
to pay interest from the date of default and until the date of payment at the
rate of 10% per annum. The Holder agrees that the above described shares of
Common Stock, which the maker pledged to the Holder and any additional or
substitute security, collateral or funds which security, collateral or funds
the Maker may deliver to the Holder shall provide the sole source of funds to
pay any amounts including but not limited to interest, cost of collection and
attorney fees for which the Maker may be liable pursuant to this Promissory
Note and no recourse shall be had against the Maker for any such amounts
except insofar as such recourse may be had under agreements pursuant to which
additional security or collateral may have been delivered to the Holder.
All Principal is payable in lawful money of the United States of America
at the office of the Holder at the address shown above, or at such other
place as may be designated in writing by the Holder of this Note, in
immediately available funds.
The Maker of this Note for herself and her legal representatives,
successors and assigns, hereby expressly waives presentment, demand, protest,
notice of protest, presentment for the purpose of accelerating maturity,
diligence in collection, and the benefit of any exemption under the homestead
exemption laws, if any, or any other exemption or insolvency laws, and
consents that the Holder hereof may release or surrender, exchange or
substitute any personal property or other collateral security now held or
which may hereafter be held as security for the payment of
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<PAGE>
this Note, and may extend the time for payment or otherwise modify the terms
of payment of any part or the whole of the debt evidenced hereby.
All agreements between the Maker and the Holder hereof are hereby expressly
limited so that in no contingency or event whatsoever, whether by reason of
acceleration of maturity of the indebtedness or otherwise, shall the amount paid
or agreed to be paid to the holder hereof for the use, forbearance or detention
of the indebtedness evidenced hereby exceed the maximum permissible amount paid
or agreed to be paid to the Holder hereof under applicable law. If, for any
circumstances whatsoever, fulfillment of any provision hereof, at the time
performance of such provision shall be due, shall involve transcending the limit
of validity prescribed by law, then IPSO FACTO the obligation to be fulfilled
shall be reduced to the limit of such validity, and if from any circumstance the
holder hereof should ever receive as interest an amount which would exceed the
highest lawful rate, such amount which would be excessive interest shall be
applied to the reduction of the payment of interest. As used herein, the term
"applicable law" shall mean the law in effect as of the date hereof, provided,
however, that in the event there is a change in the law which results in a
higher permissible rate of interest, then this Note shall be governed by such
new law as of its effective date.
This Note and all transactions hereunder and/or evidenced herein shall be
governed by, construed, and enforced in accordance with the laws of the State of
New Jersey.
IN WITNESS WHEREOF, the Maker has caused this Note to be executed as of the
date first above written.
__________________________
STATE OF )
) ss:
COUNTY OF )
On the ______ day of _______________, 199__, before me personally came
_____________________________________, known to me to be the individual
described in and who acknowledged the foregoing instrument and swore and
acknowledged that she executed the same as her free act and deed.
_____________________________
Notary Public
My commission expires _______
2
<PAGE>
PLEDGE AND SECURITY AGREEMENT
AGREEMENT made July _____, 1996, between ______________________________
of __________________________________(the "Pledgor"), and ELECTRONICS
COMMUNICATIONS CORP., 10 Plog Road, Fairfield, New Jersey 07004 (the
"Pledgee").
WHEREAS, at the execution of this agreement the Pledgee has made a
loan to the Pledgor in the sum of $1,500,000 (hereinafter referred to as
the "Loan"), as evidenced by the Promissory Note of the Pledgor payable to
Pledgee for such amount; and
WHEREAS, in order to induce the Pledgee to make the Loan, the Pledgor has
agreed to pledge certain stock with the Pledgee as security for the payment of
the Loan.
It is therefore agreed:
1. PLEDGE. In consideration of the Pledgee making the Loan, the
Pledgor hereby grants a security interest to the Pledgee in instruments of
the following description, duly endorsed in blank or accompanied by duly
endorsed stock powers, separate form, and herewith delivered to the Pledgee:
NO. OF SHARES
OF SERIES B
ISSUER PREFERRED STOCK CERTIFICATE NO.
------ --------------- ---------------
Electronics Communications Corp. 1,000,000
The Pledgee shall hold the pledged shares on the books of the Company in
the name of the Pledgor. The Pledgee shall hold the pledged shares as
security for the payment of the Loan as security for the return of the
collateral and shall not encumber or dispose of the shares except in accordance
with the provisions of paragraph 8 of this agreement.
2. DIVIDENDS. During the term of this pledge, all dividends and
other amounts received by the Pledgor as a result of his record ownership of
the pledged shares shall be applied by him to the payment of the principal and
interest on the Loan.
3. VOTING RIGHTS. During the term of this pledge, and so long as the
Pledgor is not in default in the performance of any of the terms of this
agreement or in the payment of the principal or interest of the Loan, the
Pledgor shall have the right to vote the pledged shares on all corporate
questions.
4. REPRESENTATIONS. The Pledgor warrants and represents that there
are no restrictions upon the transfer of any of the pledged shares, other than
may appear on the face of the certificates, and that the Pledgor has the right
to transfer such shares free of any
<PAGE>
encumbrances and without obtaining the consents of the other shareholders.
5. ADJUSTMENTS. In the event that, during the term of this pledge,
any share dividend, reclassification, readjustment, or other change is
declared or made in the capital structure of the Company which has issued the
pledged shares, all new, substituted, and additional shares, or other
securities, issued by reason of any such change shall be held by the Pledgee
under the terms of this agreement in the same manner as the shares
originally pledged hereunder.
6. WARRANTS AND RIGHTS. In the event that during the term of this
pledge, subscription warrants or any other rights or options shall be issued in
connection with the pledged shares, such warrants, rights, and options shall
be immediately assigned by the Pledgor to the Pledgee to be held under the
terms of this agreement, and if exercised by the Pledgor all new shares or
other securities so acquired by the Pledgor shall be immediately assigned to
the Pledgee to be held under the terms of this agreement in the same manner as
the shares originally pledged hereunder.
7. PAYMENT OF LOAN. Upon payment at maturity of the principal and
interest of the Loan, less amounts theretofore received and applied by the
Pledgee in reduction thereof, the Pledgee shall return to the Pledgor all the
pledged shares.
8. DEFAULT. In the event that the Pledgor defaults in the performance
of any of the terms of this agreement, or in the payment at maturity of the
principal or interest of the Loan, the Pledgee shall have the rights and
remedies provided in the Uniform Commercial Code in force in the State of New
Jersey at the date of this agreement and in this connection, the Pledgee
may upon five days' notice to the Pledgor, sent by registered mail, and
without liability for any diminution in price which may have occurred, sell all
the pledged shares in such manner and for such price as the Pledgee may
determine. At any bona fide public sale the Pledgee shall be free to purchase
all or any part of the pledged shares. Out of the proceeds of any sale the
Pledgee may retain an amount equal to the principal and interest then due on
the Loan, plus the amount of the expenses of the sale, and shall pay any
balance of such proceeds to the Pledgor.
[SIGNATURE PAGE FOLLOWS]
<PAGE>
IN WITNESS WHEREOF the parties have executed this agreement on the day
first above written.
PLEDGOR
_________________________
PLEDGEE
ELECTRONICS COMMUNICATIONS CORP.
___________________________
By:
<PAGE>
EXHIBIT 10.3
<PAGE>
LOAN AGREEMENT
THIS AGREEMENT, dated September 20, 1996 by and between Electronics
Communications Corp., with offices located at 10 Plog Road, Fairfield, New
Jersey 07004 hereinafter referred to as "Borrower" or "the Company" and
Marrotta Group, with offices located at 203-20 Rocky Hill Road, Bayside, New
York 11361 hereinafter referred to as "Lender."
WHEREAS, the Borrower has requested that the Lender make a loan to the
Borrower in the principal amount of Five Hundred Thousand ($500,000) Dollars
for the general corporate purposes, and
WHEREAS, subject to the terms and conditions hereinafter set forth, the
Lender is willing to make such loan to Borrower;
NOW THEREFORE, in consideration of the promises and the mutual covenants
and agreements herein contained, the parties hereto agree as follows:
Section 1. THE LOAN
1.1 LOAN. The Lender agrees, subject to the terms and conditions
hereinafter set forth, to loan to Borrower the aggregate principle
amount of Five Hundred Thousand ($500,000) Dollars. The aggregate
principle amount borrowed by the borrower from the Lender is herein
called the "Loan." The Lender agrees to lend to the Borrower and
the Borrower agrees to borrow from the Lender the sum of Five
Hundred Thousand ($500,000) Dollars which shall hereinafter be
classified as a Senior Debt payable by the Borrower to the Lender,
with all rights attendant thereto.
1.2 PROMISSORY NOTE. The Loan shall be made and evidenced by a
promissory note of the Borrower substantially in the form
annexed hereto ("Promissory Note"),
1.3 INTEREST. Interest shall be paid at the rate of ten (10%) percent
per annum and will be payable on the first anniversary of the Loan,
or at such time prior to the first anniversary of the Loan should
the Borrower make full payment to the Lender. All interest payments
by the Borrower to the Lender shall be in cash or the common stock
of the Company, the choice of which shall be at the sole discretion
of the Company.
1.4 PRINCIPLE. The aggregate principal amount of the Loan and
Promissory Note is Five Hundred Thousand ($500,000) Dollars.
1.5 PAYMENT. Payment of the loan and Promissory Note shall be made on
or before June 20, 1997. At such time as payment becomes due from
Borrower to Lender, the Borrower may request and the Lender shall be
bound to grant a three (3) month extension of the Loan in which case
full payment shall be due no later than September 20, 1997. Upon
the occurrence of a change in control of the Company or upon a
change in the management of the Company, the Loan shall immediately
become due upon demand of the Lender.
1
<PAGE>
1.6 USE OF PROCEEDS. The borrower agrees that the proceeds of the Loan
shall be used fully and exclusively for general corporate purposes.
1.7 OTHER CONSIDERATION. In further consideration for making the Loan,
in addition to the foregoing repayment terms, Borrower shall issue
to Lender, or its assignees or assigns, 200,000 shares of the
Company's common stock with Demand and Piggy Back Registration
Rights and 400,000 class A warrants of the Company with Demand and
Piggy Back Registration Rights. Lender represents and warrants that
the shares and warrants received under the terms of this Agreement
may not be sold to any foreign entity or person whatsoever.
Section 2. REPRESENTATIONS AND WARRANTIES OF BORROWER
The Borrower represents and warrants that:
2.1 CORPORATE EXISTENCE, POWER AND AUTHORITY OF THE BORROWER. The
Borrower is a corporation duly organized, validly existing and in
good standing under the laws of its jurisdiction of incorporation
of formation and is duly licensed or qualified in each jurisdiction
where the character of the property owned by it or the nature of the
business transacted by it requires such licensing or qualification.
The borrower has all requisite power, authority and legal right to
conduct business as it is now being conducted and to enter into,
consummate and perform all the provisions of this Agreement, and any
instrument, agreement or document referred to herein to which the
Borrower is or shall be a party, have been duly authorized by all
corporate and other required actions.
2.2 NO CONFLICTS. The execution, delivery and performance by the
Borrower of this Agreement, the Promissory Note or any other
instrument, agreement or document, referred to herein does not and
will not result in any violation of, or be in conflict with, any
terms or provision of the Articles of Incorporation or By-Laws of
the Borrower, or any statute, governmental regulation or order,
judgment, decree, agreement, indenture or instrument applicable to
any thereof.
2.3 AUTHORIZATIONS. All governmental approvals, licenses,
authorizations, consents, filings and registrations, if any, required
for the delivery and execution of this Agreement and any applicable
instrument, agreement or document referred to herein have been
obtained or made, and are final and are not subject to review or
appeal or, to the knowledge or belief of the Borrower, the subject of
any pending or threatened attack or appeal be direct proceedings or
otherwise.
Section 3. JURISDICTION
3.1 NEW YORK JURISDICTION. The Borrower hereby irrevocably submits to
the jurisdiction of the Supreme Court of the State of New York,
County of Nassau in any action, suit, or proceeding brought
against the Borrower and related to or in connection with this
Agreement or any other instrument, agreement or document referred to
herein or any transaction contemplated hereby.
2
<PAGE>
In Witness Whereof, the parties have caused this Agreement to be duly
executed and delivered as of the date first above written.
Electronics Communications Corp.
By: /s/WILLIAM S. TAYLOR
------------------------------
William S. Taylor, President
Marrotta Group
By: /s/GREGG MARCUS
------------------------------
Gregg Marcus, President
<PAGE>
EXHIBIT 10.4
<PAGE>
LOAN AGREEMENT
THIS AGREEMENT, dated October 9, 1996 by and between Electronics
Communications Corp., with offices located at 10 Plog Road, Fairfield, New
Jersey 07004 hereinafter referred to as "BORROWER" or "THE COMPANY" and
Robert P. DePalo, residing at 208-16 38th Avenue, Bayside, New York 11361
hereinafter referred to as "LENDER".
WHEREAS, the Borrower has requested that the Lender make a loan to the
Borrower in the principal amount of One Hundred and Eighty Thousand
($180,000) Dollars for general corporate purposes, and
WHEREAS, subject to the terms and conditions hereinafter set forth, the
Lender is willing to make such loan to Borrower;
NOW THEREFORE, in consideration of the promises and the mutual
covenants and agreements herein contained, the parties hereto agree as
follows:
Section 1. THE LOAN
1.1 LOAN. The Lender agrees, subject to the terms and conditions
hereinafter set forth, to loan to Borrower the aggregate principal
amount of One Hundred and Eighty Thousand ($180,000) Dollars. The
aggregate principal amount borrowed from the lender is herein called
the "Loan". The Lender agrees to lend to the Borrower and the
Borrower agrees to borrow from the Lender the sum of One Hundred and
Eighty Thousand ($180,000) Dollars which shall hereinafter be
classified as Senior Collateralized Debt payable by the Borrower to
the Lender, with all rights attendant thereto.
1.2 COLLATERAL. The Loan shall be secured by all of the company's
current and future account receivable as well as all equipment and
fixtures owned by the company or it's subsidiaries.
1.3 PROMISSORY NOTE. The Loan shall be made and evidenced by a
promissory note of the Borrower substantially in the form annexed
hereto ("Promissory Note").
1.4 INTEREST. Interest shall be paid at the rate of ten (10%) percent
per annum and will be payable month starting on November 9, 1996.
1.5 PRINCIPAL. The aggregate principle amount of the Loan and
Promissory Note is One Hundred and Eighty Thousand ($180,000)
Dollars.
1.6 PAYMENT. Payment of the loan and Promissory Note shall be due on
three (3) day written demand notice to the company from the lender,
all notices shall be sent via United States Postal Service Certified
Mail Return Receipt Requested.
1.7 CONFESSION OF JUDGMENT. In the event of a default which is not
cured within five (5) business days of written notice of default,
the company irrevocably submits and consents to allow the Lender to
enter a judgment and levy on the same.
1.8 USE OF PROCEEDS. The borrower agrees that the proceeds of the Loan
shall be used fully and exclusively for general corporate purposes.
Section 2. REPRESENTATIONS AND WARRANTIES OF BORROWER
The Borrower represents and warrants that:
<PAGE>
2.1 CORPORATION EXISTENCE, POWER AND AUTHORITY OF THE BORROWER. The
Borrower is a corporation duly organized, validly existing and in
good standing under the laws of its jurisdiction of incorporation of
formation and is duly licensed or qualified in each jurisdiction
where the charter of the property owned by it or the nature of the
business transacted by it requires such licensing or qualification.
The borrower has all requisite power, authority and legal right to
conduct business as it is now being conducted and to enter into,
consummate and perform all the provisions of this Agreement, and
any instrument, agreement or document referred to herein to which the
Borrower is or shall be a party, have been duly authorized by all
corporate and other required actions.
2.2 NO CONFLICTS. The execution, delivery and performance by the
Borrower of this Agreement, the Promissory Note or any other
instrument, agreement or document, referred to herein does not and
will not result in any violation of, or be in conflict with, any
terms or provision of the Articles of Incorporation or by-law's of
the Borrower, or any statue, governmental regulation or order,
judgment, decree, agreement, indenture or instrument applicable to
any thereof.
2.3 AUTHORIZATIONS. All governmental approvals, licenses,
authorizations, consents, fillings and registrations, if any,
required for the delivery and execution of this Agreement and any
applicable instrument, agreement or document referred to herein have
been obtained or made, and are final and are not subject to review or
appeal or, to the knowledge or belief of the Borrower, the subject of
any pending or threatened attack or appeal be direct proceedings or
otherwise.
Section 3. JURISDICTION
3.1 NEW YORK JURISDICTION. The Borrower hereby irrevocably submits to
the jurisdiction of the Supreme Court of the State of New York,
County of Queens in any action, suit, or proceeding brought against
the Borrower and related to or in connection with this Agreement or
any other instrument, agreement or document referred to herein or any
transaction contemplated hereby.
In Witness Whereof, the parties have caused this Agreement to be duly
executed and delivered as of the date first above written.
Electronics Communications Corp.
By: /s/ William S. Taylor
--------------------------------
William S. Taylor, President
By: /s/ Les Winder
--------------------------------
Les Winder, Executive Vice President
/s/ Robert P. De Palo
- ---------------------------------
Robert P. De Palo (Lender)
<PAGE>
EXHIBIT 10.5
CLIENT SERVICE AGREEMENT
This Agreement is made and entered into this 4th day of September, 1996 between
Great Deals, Inc., located at 80 Cutter Mill Road, Great Neck, NY 11021,
hereinafter referred to as "Great Deals", and Electronics Communications Corp.,
located at 10 Plog Road, Fairfield, NJ 07004, hereinafter referred to as "ECC."
WITNESSETH:
Whereas, Great Deals is a public relations firm specializing in the
dissemination of information about publicly traded companies, and
Whereas, ECC is publicly held with its common stock trading on one or more stock
exchanges including The NASDAQ Stock Market, and
Whereas, ECC desires to publicize itself with the intention of making its name
and business better known throughout the brokerage community and among
investors, and
Whereas Great Deals is willing to accept ECC as a client,
NOW THEREFORE, in consideration of the mutual covenants herein contained, it is
agreed:
1. ENGAGEMENT: ECC hereby engages Great Deals to publicize ECC to brokers,
prospective investors and shareholders, and subject to further provisions of
this Agreement. Great Deals hereby accepts ECC as a client and agrees to
publicize it as described in Section 2 of this Agreement, but subject to the
further provisions of this Agreement.
2. MARKETING PROGRAM: Consists of the following components:
(A) Great Deals will review and analyze all aspects of ECC's goals and make
recommendations on feasibility and achievment of desired goals.
(B) Great Deals will review all of the general information and recent
filings from ECC and produce at least 80,000 copies of a valid, professionally
written, Independent Analysts Research Report describing ECC's business. The
research Report will be prepared in brokerage style format and will be utilized
by Great Deals in educating the brokerage community regarding ECC's story and
business opportunity.
(C) Great Deals will provide through their network, firms and brokers
interested in participating with Great Deals in promoting ECC and schedule and
conduct the necessary due diligence and obtain the required approvals necessary
for those firms to participate. Great Deals will also interview and make
determinations on any firms or brokers referred by ECC with regard to their
participation.
(D) Great Deals will schedule at least two (2) broker dealer conferences
per month over the next year, commencing from the date of this Agreement. These
conferences, the expenses for which ECC shall alone be responsible, are itended
to tell ECC's story to the investment community and expose ECC to as many
brokers, dealers, and potential market makers as possible. Great Deals will
prepare all necessary documents, handouts, or other such printed matter as may
be required to properly conduct such meetings. ECC agrees to produce and make
<PAGE>
available to Great Deals copies of a audio, vidio, or slide presentation
suitable for investment professionals.
(E) Great Deals will use its best efforts to obtain for ECC significant
exposure on national financial radio programming, in independent financial
newsletters, and through on-line facsimile internet and other broadcast media
services.
(F) Great Deals will bring in at least two (2) market makers that will
actively make a market in ECC's stock.
(G) Great Deals will undertake special projects related to promoting ECC's
business planning and will assist in the preperation of business plans and
financial models and projections over the next two (2) years, commencing from
the date of this Agreement.
3. TIME OF PERFORMANCE: Services to be performed under this Agreement shall
commence upon execution of this Agreement and shall continue until completion,
which is expected to occur within twenty-four (24) months. Upon completion this
Agreement shall automatically renew for an additional 1 year term, pending
agreement of mutually acceptable terms between Great Deals and ECC.
4. COMPENSATION AND EXPENSES: In consideration of the services to be
performed by Great Deals, ECC agrees to pay compensation to Great Deals an
amount equal to the greater of $752,000 or 2,300,000 shares of ECC's common
stock which shall be payable in freely traded shares of ECC which are to be
issued in the following manner:
Hector Montes 1,150,000 shares
Jose Rosado 1,150,000 shares
Great Deals shall pay and be responsible for all expenses it incurs except for
expenses specifically related to broker or investment conferences and meetings,
printing of business plans and financial models, slide, video, audio production
costs, or expenses related to special projects.
5. GUARANTY: In consideration of the payment of $752,000/2,300,000 shares
from ECC to Great Deals, Great Deals hereby guarantees that through Great
Deals' promotional efforts it will bring in at least four (4) new market makers
to support the Company's common stock. If Great Deal's does not meet this
commitment, it will repay either $752,000 or 2,300,000 shares of common stock
to ECC.
6. REPRESENTATIONS AND WARRANTIES OF ECC: ECC represents and warrants to
Great Deals, each representation and warranty being deemed to be material that:
(A) ECC will cooperate fully and timely with Great Deals to enable Great
Deals to perform its obligation under this Agreement.
(B) The execution and performance of this Agreement by ECC has been duly
authorized by the Board of Directors of ECC in accordance with applicable law.
(C) The performance of ECC under this Agreement will not violate any
applicable court decree, law, or regulation, nor will it violate any provisions
of the organizational documents of ECC or any contractual obligations by which
ECC may be bound.
<PAGE>
(D) ECC will promptly deliver to Great Deals a list of brokers and market
makers of ECC's securities which have been following ECC.
7. EARLY TERMINATION: If ECC fails to fulfill its obligations as described
herein, or fails to make timely payment of the compensation set forth herein,
Great Deals shall have the right to terminate this Agreement and any further
performance by Great Deals under this Agreement shall no longer be required.
8. LIMITATION OF LIABILITY: If Great Deals fails to perform its services
hereunder, its entire liability to ECC shall not exceed the lessor of (a) the
amount of cash/securities compensation has received from ECC under the terms of
this Agreement or (b) the actual damage to ECC as a result of such
non-performance. IN NO EVENT WILL ECC BE LIABLE FOR ANY INDIRECT SPECIAL OR
CONSEQUENTIAL DAMAGES NOR FOR ANY CLAIM AGAINST ECC BY ANY PERSON OR ENTITY
ARISING FROM OR IN ANY WAY RELATED TO THIS AGREEMENT.
9. OWNERSHIP OF MATERIALS: All right, title, and interest in and to material to
be produced by Great Deals in connection with the contract and other services to
be rendered under this Agreement shall become the sole property of ECC. Great
Deals shall be entitled to at least one (1) copy of the materials it produces
for ECC.
10. CONFIDENTIALITY: Until such time as the same may become publicly known,
Great Deals agrees that any and all information transmitted to it from ECC are
to be considered confidential and Great Deals agrees to hold all information
confidential and not to disclose such information to any person, company or
entity without the prior written approval of ECC, except as may be reasonably
required in the performance of Great Deals obligations as described herein. Upon
completion of its duties as described herein, Great Deals agrees to return all
materials furnished to it by ECC to ECC.
11. NOTICES: All notices hereunder shall be in writing and addressed to the
party at the address herein set forth, or at such other address as to which
notice pursuant to this section may be given and shall be delivered by personal
delivery, certified mail, express mail, or by national overnight courier
service. Notices will be deemed given upon the earlier of actual receipt or
three (3) business days after being mailed or delivered to such courier service.
Notice shall be addressed to Great Deals at:
Great Deals, Inc.
60 Cutter Mill Road
Great Neck, NY 11021
Attention: John Lamendola, Esq.
Hector Montes
Jose Rosado
and to ECC at:
Electronics Communications Corp.
10 Plog Road
Fairfield, NJ 07004
Attention: Brenda Taylor
<PAGE>
Any notices to be given hereunder will be effective if executed and sent by the
attorneys for the parties giving such notice, and in connection therewith the
parties and under their respective counsel agree that in giving such notice such
counsel may communicate directly in writing with such parties to the extent
necessary to give such notice.
12. SEPARABILITY: If one or more of the provisions of this Agreement shall be
held invalid, illegal, or unenforceable, and provided that such provision is not
essential to the transaction provided for by this Agreement, shall not affect
any other provision hereof, and the Agreement shall be construed as if such
provision had never been contained herein.
13. ARBITRATION: Any controversy or claim arising out of or relating to the
Agent Agreement, or the breach thereof, shall be setteled by arbitration in
accordance with the commercial arbitration rules of the American Arbitration
Association, and judgment upon the award rendered by the arbitrator(s) may be
entered in any court having jurisdiction thereof.
14. MISCELLANEOUS:
(A) EFFECTIVE DATE OF REPRESENTATIONS: Shall be no later than the date
Great Deals is prepared to commence its promotional activities pursuant to the
contract.
(B) GOVERNING LAW: This Agreement shall be governed by and interpreted
under the laws of the State of New Jersey where ECC has been conducting its
business and this Agreement has been accepted by Great Deals.
(C) CURRENCY: In all instances, references to dollars shall be deemed to be
United States Dollars.
(D) MULTIPLE COUNTERPARTS: This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original.
CONFIRMED AND AGREED ON THE 4TH DAY OF SEPTEMBER, 1996
ELECTRONICS COMMUNICATIONS CORP.
By:/s/ Les Winder
--------------------------------------
Les Winder, Executive Vice President
CONFIRMED AND AGREED ON THE 4TH DAY OF SEPTEMBER, 1996
GREAT DEALS, INC.
By:/s/John Lamendola
- --------------------------------------
John Lamendola
<PAGE>
ELECTRONICS COMMUNICATIONS CORPORATION
10 PLOG ROAD
FAIRFIELD, NEW JERSEY 07004
TELEPHONE (201) 808-8862
FACSIMILE (201) 808-8865
October 7, 1996
Emerging Growth Technologies, Inc.
369 Lexington Avenue
New York, NY 10017
Gentlemen:
This is to confirm that heretofore Electronics Communications Corp. ("ECC")
and its wholly-owned subsidiary, Personal Communications Network, Inc. ("PCN")
have retained the services of Emerging Growth Technologies, Inc. ("EGT") and
Andrew James ("James") to provide financial consulting and advisory services to
ECC and PCN including, without limitation, general advise with respect to
financing, acquisition, joint venture or other corporate transactions which ECC
and PCN are currently contemplating g or which they may consider at a future
time.
In connection with the foregoing, EGT and James have introduced ECC and PCN
to such parties as Emerson Radio Corp., Teletek, Inc., Solomon Brothers, and
others and have consulted with ECC and PCN on other corporate matters. In
consideration of the foregoing and the services rendered by the undersigned to
date, PCN is herewith issuing to EGT 8 shares of its common stock and to James,
2 shares of its common stock, which shares of common stock equal 10% of the
issued and outstanding common stock of PCN (the "Shares") giving affect to the
within transaction. ECC and PCN represent and warrant to the undersigned that
the issuance of the Shares to the undersigned was duly authorized by PCN and ECC
and the Shares are validly issued, fully paid and non-assessable. Further, ECC
and PCN warrant that PCN has only one (1) class of capital stock authorized; to
wit, its common stock and there are no shares of common stock issued and
outstanding as of the date hereof.
The parties agree that on and after the date hereof, if PCN shall issue any
further shares of its capital stock or any securities convertible into shares of
its capital stock, it will allow EGT and James the right to subscribe to such
additional shares of PCN's capital stock so that each of EBT and James may
maintain their current percentage of equity ownership in PCN.
The parties agree that the certificate evidencing the Shares shall bear the
following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933. AS AMENDED (THE "ACT") AND MAY NOT BE SOLD
OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN
<PAGE>
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR AN OPINION OF COUNSEL
SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.
If the foregoing fairly reflects our agreement, please be so kind as to
sign this letter where indicated below.
Very truly yours,
Emerging Growth Technologies, Inc.
By: /S/ Martine Amen
-----------------------------
Martine Amen, Asst. Secretary
AGREED AND CONSENTED TO:
Electronics Communications Corp.
By: /S/ William S. Taylor
---------------------------
William S. Taylor, President
Personal Communications Network, Inc.
By: /S/ William S. Taylor
----------------------------
William S. Taylor, President
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,122,669
<SECURITIES> 0
<RECEIVABLES> 1,368,334
<ALLOWANCES> 60,240
<INVENTORY> 259,271
<CURRENT-ASSETS> 2,941,626
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0
40,000
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</TABLE>
