<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-QSB/A-1
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.
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<PAGE>
PAGE 1
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31,
------------ ------------
1996 1995
---- ----
<S> <C> <C>
(UNAUDITED)
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 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 Licenses 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.
<PAGE>
PAGE 2
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
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.
<PAGE>
PAGE 3
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (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 $461,006 $1,710,263 $2,675,002 $3,435,909
Commissions 771,083 537,538 3,087,050 1,941,601
Paging & 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 918,371 1,430,428 2,718,105 2,787,085
Commissions 370,951 423,064 2,069,348 1,530,772
Paging & Two Way Radio 350,550 -- 350,550 --
----------- ----------- ----------- -----------
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 INCOME (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 -- 12,203 --- 12,203
----------- ----------- ----------- -----------
TOTAL OTHER INCOME 15,254 12,203 15,254 12,203
OTHER EXPENSES
Interest Expense 47,375 6,412 114,464 43,298
Settlement of Potential Litigation -- -- 73,769 0
Amortization of Bridge Financing Costs -- -- -- 606,943
----------- ----------- ----------- -----------
TOTAL OTHER EXPENSES 47,375 6,412 188,233 650,241
----------- ----------- ----------- -----------
NET LOSS BEFORE INCOME TAXES (2,407,409) (1,065,437) (3,103,368) (1,659,186)
Income Taxes -- -- -- --
----------- ----------- ----------- -----------
NET LOSS (2,407,409) (1,065,437) (3,103,368) (1,659,186)
RETAINED (DEFICIT), BEGINNING OF PERIOD (3,643,498) (912,329) (2,947,539) (318,580)
----------- ----------- ----------- -----------
RETAINED (DEFICIT), END OF PERIOD ($6,050,907) ($1,977,766) ($6,050,907) ($1,977,766)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
LOSS PER COMMON SHARE
PRIMARY (0.51) (0.23) (0.66) (0.35)
FULLY DILUTED (0.64) (0.16) (0.52) (0.06)
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.
<PAGE>
PAGE 4
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 Agreement 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)
Bid Deposit --
Payment for purchase of Threshold Communications, Inc. net of cash acquired (180,556) --
Other Assets (147,105) (164,458)
----------- ------------
NET CASH USED BY INVESTING (2,569,505) (613,571)
ACTIVITIES ----------- ------------
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)
Net Proceeds from Debentures --
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.
<PAGE>
PAGE 5
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
September 30, 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.
<PAGE>
PAGE 6
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 Electrocom 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% of Threshold Communications,
Inc. (which engages in the business of providing radio paging services in
the New York Metropolitan Area.)
On March 22, 1996, Threshold Communications, Inc. ("TCI") acquired
substantially all of the assets and assumed certain liabilities of General
Communications and Electronics, Inc. ("GCE"). TCI also acquired as part of
this transaction 56 2/3% of the outstanding stock of General Towers of
America, Inc. (which engages in the business of providing two way radio
services in the New York Metropolitan Area). TCI and its subsidiary
General Towers of America, Inc. ("GTA") are treated as subsidiaries of
the Company.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and
Article 10 of Regulation S-X. Accordingly, they do not
necessarily include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the nine months ended September
30, 1996 are not necessarily
<PAGE>
PAGE 7
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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-KSB 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.
<PAGE>
PAGE 8
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 activation's 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"). 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 these 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
<PAGE>
PAGE 9
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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). These
shares were sold at a $.75 (37.5%) discount to the market price of the
Company's Common Stock on such date. This transaction was negotiated at
arms length with the investors. The primary reasons why the discount was
so large, was based on the aggregate amount of the shares relative to the
total number of shares outstanding, the limited liquidity in the Company's
Common Stock at such time, and the fact the Common Stock was unregistered.
Management determined that it was in the best interest of the Company to
sell such shares, because the Company required large capital infusions to
make the payments to the FCC for the six PCS licenses the Company obtained
on May 8, 1996. 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).
<PAGE>
PAGE 10
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - ACQUISITION, RECAPITALIZATION AND PUBLIC OFFERING - (CONTINUED)
The following unaudited pro forma combined results of operations for the
nine months ended September 30, 1996 accounts for the acquisition described
above as if it had occurred on January 1, 1996.
UNAUDITED PRO FORMA COMBINED RESULTS OF OPERATIONS
Nine Months Ended
September 30, 1996
-----------------------
Sales $7,528,806
Net Earnings $3,254,362
Net Earnings Per Common Share
Primary (.69)
Fully Diluted (.56)
(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.
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.
<PAGE>
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ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - OTHER ASSETS - (CONTINUED)
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. The principal shareholder of TCI is not a related
party.
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.
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.
<PAGE>
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ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
<PAGE>
PAGE 13
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - NOTES PAYABLE - (CONTINUED)
(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.
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.
<PAGE>
PAGE 14
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
<PAGE>
PAGE 15
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
(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 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 Mr. Winder 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 leased office and warehouse space was 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.
<PAGE>
PAGE 16
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - OPERATING LEASE - (Continued)
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.
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
<PAGE>
PAGE 17
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - PENDING LITIGATION - (Continued)
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 - 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.
<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: January 22, 1997
ELECTRONICS COMMUNICATIONS CORP.
By: /s/ William S. Taylor
------------------------------------
William S. Taylor, President
