<PAGE>
FORM 10-KSB / A-3
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended: DECEMBER 31, 1995
-------------------
Commission File Number: 0-24486
ELECTRONICS COMMUNICATIONS CORP.
(Exact Name of Registrant as Specified in its Charter)
Delaware 11-2649088
(State or other jurisdiction of (I.R.S Employer Identification No.)
incorporation or organization)
10 Plog Road, Fairfield, New Jersey 07004
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 808-8862
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange on which
Title of each class each class is registered
- ------------------- ------------------------
Common Stock, $.05 par value BOSTON STOCK EXCHANGE
Class A Redeemable Warrants BOSTON STOCK EXCHANGE
Securities registered pursuant to Section 12 (g) of the Act: None
(Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements by
reference in Part III of this Form 10-KSB or any amendment to the Form 10-KSB.
[ X ]
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 such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
State issuer's revenue for its most recent fiscal year, $8,736,515
As of March 27, 1996, the aggregate value of the registrant's voting stock
held by non-affiliates was $4,627,738 (computed by multiplying the last reported
bid price on March 27, 1996 by the number of shares of common stock held by
persons other than officers, directors or by record holders of 10% or more of
the registrant's outstanding common stock. This characterization of officers,
directors and 10% or more beneficial owners as affiliates is for purposes of
computation only and is not an admission for any purposes that such persons are
affiliates of the registrant).
<PAGE>
As of March 27, 1996, there were 3,073,127 shares of the registrant's
common stock, $.05 par value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
DOCUMENT FORM 10-KSB REFERENCE
Certain Previously Filed Exhibits IV
<PAGE>
Page 1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
To the Stockholders
Electronics Communications Corp.
We have audited the accompanying consolidated balance sheets of Electronics
Communications Corp. and subsidiaries as of December 31, 1995 and 1994, and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of materail misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the finacial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Electronics
Communications Corp. and subsidiaries as of December 31, 1995 and 1994, and
the consolidated results of their operations and their cash flows for the
years then ended in conformity with generally accepted accounting priciples.
STETZ, BELGIOVINE CPAS, P.C.
March 25, 1996
Montclair, NJ 07042
<PAGE>
Page 2
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1995 1994
---- ----
<S> <C> <C>
CURRENT ASSETS
Cash $18,000 $136,203
Restricted Cash 1,100,000 -
Accounts Receivable
(Net of $80,987 and $30,197 Allowance
for Doubtful Accounts at December 31, 1995
and 1994, respectively.) 2,204,789 1,590,943
Inventories 476,796 544,455
Bid Deposit 1,000,000 -
Loan Receivable 550,000 -
Prepaid Expenses 78,849 38,293
------------ ------------
TOTAL CURRENT ASSETS 5,428,434 2,309,894
------------ ------------
PROPERTY AND EQUIPMENT
Property and Equipment 335,858 116,264
Accumulated Depreciation (75,544) (25,579)
------------ ------------
NET PROPERTY AND EQUIPMENT 260,314 90,685
------------ ------------
OTHER ASSETS
Deferred Financing Costs - 606,943
Deferred Offering Costs - 196,716
Deferred Private Placement Costs 225,787 -
Deferred License Costs 293,810 -
Security Deposits and Other Assets 38,313 27,094
------------ ------------
TOTAL OTHER ASSETS 557,910 830,753
------------ ------------
TOTAL ASSETS $6,246,658 $3,231,332
------------ ------------
------------ ------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
Page 3
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1995 1994
---- ----
<S> <C> <C>
CURRENT LIABILITIES
Accounts Payable $1,783,344 $1,722,867
Notes Payable - Other 28,000 140,000
Notes Payable - Bank 1,225,000 90,000
Notes Payable - Bridge Financing - 800,000
Notes Payable - Stockholders 252,007 64,391
Current Portion of Obligations Under Capital Leases 50,244 -
Private Placement Advance 116,223 -
Accrued Expenses and Taxes Payable 248,764 108,508
------------ ------------
TOTAL CURRENT LIABILITIES 3,703,582 2,925,766
------------ ------------
LONG TERM LIABILITIES
Obligations Under Capital Leases 78,801 -
------------ ------------
STOCKHOLDERS' EQUITY
Series A Non-Voting, Convertible Preferred Stock,
par value $.01 per share, 1,500,000 authorized,
240,000 issued and outstanding in 1994. - 2,400
Common Stock, par value $.05 per share, 8,400,000
authorized, issued and outstanding 3,003,697
in 1995, issued and outstanding 1,516,086 in 1994. 150,186 75,804
Additional Paid-In Capital 5,320,629 644,942
Retained (Deficit) (2,947,539) (318,580)
Notes Receivable arising from Common Stock Purchase Warrants (59,001) (99,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 2,464,275 305,566
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $6,246,658 $3,231,332
------------ ------------
------------ ------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
Page 4
<TABLE><CAPTION>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Additional Retained
Preferred Stock Common Stock Paid-In Earnings
--------------------- ------------------------
Shares Amount Shares Amount Capital (Deficit)
--------------------- ------------------------ ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance as of January 1, 1994 - - 1,176,086 $58,804 $17,196 ($348,399)
Adjustment Due to Reverse
Acquisition (Notes 1 and 2) - - - - (13,354) -
Sale of Common Stock (Notes 2) - - 340,000 17,000 33,000 -
Preferred Stock Issued in Bridge Financing
(Note 12) 240,000 2,400 - - 485,100 -
Common Stock Purchase A Warrants
Issued in Bridge Financing (Note 7B) - - - - 24,000 -
Common Stock Purchase B Warrants
Sold to Stockholders (Note 13) - - - - 99,000 -
Net Income - - - - - 29,819
---------- ---------- ------------ ----------- ------------- -------------
Balance as of December 31, 1994 240,000 2,400 1,516,086 75,804 644,942 (318,580)
Payment of Loan for Purchase B Warrants - - - - - -
Conversion of Preferred Shares (240,000) (2,400) 240,000 12,000 (9,600) -
Sale of Common Stock (Note 2B) - - 1,000,000 50,000 3,396,569 -
Sale of 2,000,000 "A" Warrants (Note 2B) - - - - 200,000 -
Sale of 300,000 "A" Warrants (Note 2B) - - - - 26,100 -
Stock Issued in Connection with
Advertising and Promotional Services (Note 10) - - 200,000 10,000 1,065,000 -
Replacement of Shares - - 47,611 2,382 (2,382) -
Net Loss - - - - - (2,628,959)
---------- ---------- ------------ ----------- ------------- -------------
Balance as of December 31, 1995 - - 3,003,697 $150,186 $5,320,629 ($2,947,539)
---------- ---------- ------------ ----------- ------------- -------------
---------- ---------- ------------ ----------- ------------- -------------
<CAPTION>
Notes Receivable
Arising From
Common Stock
Purchase Warrants Total
--------------------- --------------
<S> <C> <C>
Balance as of January 1, 1994 - ($272,399)
Adjustment Due to Reverse
Acquisition (Notes 1 and 2) - (13,354)
Sale of Common Stock (Notes 2) - 50,000
Preferred Stock Issued in Bridge Financing
(Note 12) - 487,500
Common Stock Purchase A Warrants
Issued in Bridge Financing (Note 7B) - 24,000
Common Stock Purchase B Warrants
Sold to Stockholders (Note 13) (99,000) -
Net Income - 29,819
--------------------- --------------
Balance as of December 31, 1994 (99,000) 305,566
Payment of Loan for Purchase B Warrants 39,999 39,999
Conversion of Preferred Shares - -
Sale of Common Stock (Note 2B) - 3,446,569
Sale of 2,000,000 "A" Warrants (Note 2B) - 200,000
Sale of 300,000 "A" Warrants (Note 2B) - 26,100
Stock Issued in Connection with
Advertising and Promotional Services (Note 10) - 1,075,000
Replacement of Shares - -
Net Loss - (2,628,959)
--------------------- --------------
Balance as of December 31, 1995 ($59,001) $2,464,275
--------------------- --------------
--------------------- --------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
Page 5
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------------
1995 1994
---- ----
<S>> <C> <C>
SALES
Electronics $4,943,988 $5,414,765
Commissions 3,792,527 4,009,199
------------ ------------
TOTAL SALES 8,736,515 9,423,964
------------ ------------
COST OF SALES
Electronics 4,368,493 4,920,269
Commissions 3,195,601 3,262,418
------------ ------------
TOTAL COST OF SALES 7,564,094 8,182,687
------------ ------------
GROSS PROFIT 1,172,421 1,241,277
------------ ------------
EXPENSES
Selling 1,103,963 502,110
General and Administrative 961,281 613,707
Advertising and Promotional Services 1,075,000 -
------------ ------------
TOTAL EXPENSES 3,140,244 1,115,817
------------ ------------
OPERATING INCOME (LOSS) BEFORE OTHER INCOME,
OTHER EXPENSES AND INCOME TAXES (1,967,823) 125,460
------------ ------------
OTHER INCOME
Interest Income 31,234 -
------------ ------------
TOTAL OTHER INCOME 31,234 -
------------ ------------
OTHER EXPENSES
Interest Expense 85,427 42,810
Amortization of Bridge Financing Costs 606,943 48,557
------------ ------------
TOTAL OTHER EXPENSES 692,370 91,367
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (2,628,959) 34,093
Income Taxes - 4,274
------------ ------------
NET INCOME (LOSS) ($2,628,959) $29,819
EARNINGS (LOSS) PER COMMON SHARE ($1.11) $0.02
------------ ------------
------------ ------------
AVERAGE COMMON SHARES OUTSTANDING (NOTE 11) 2,368,809 1,506,277
------------ ------------
------------ ------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
Page 6
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------------------
1995 1994
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) ($2,628,959) $29,819
Adjustments to Reconcile Net Income (Loss) to
Net Cash Used By Operations:
Non - Cash Advertising and Promotion Services 1,075,000 -
Depreciation and Amortization 656,908 60,496
Provision for Doubtful Accounts 50,790 21,094
Deferred Income Taxes - (5,083)
Debt Issue Cost - (144,000)
Changes in:
Accounts Receivable (664,636) (660,431)
Inventories 67,659 262,233
Prepayments (40,556) (22,047)
Accounts Payable 60,477 (33,594)
Security Deposits (17,715) (13,876)
Accrued Expenses and Taxes Payable 140,256 66,016
------------ ------------
TOTAL ADJUSTMENTS 1,328,183 (469,192)
------------ ------------
NET CASH USED BY OPERATING ACTIVITIES (1,300,776) (439,373)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Bid Deposit (1,000,000) -
Loan Receivable (550,000) -
Additions to Property and Equipment (88,021) (87,039)
Deferred License Costs (293,810) -
Collection of Notes Receivable 39,999 -
Other Assets 6,496 (8,220)
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (1,885,336) (95,259)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Proceeds from Bridge Financing - 800,000
Payments of Bridge Loans (800,000) -
Net Payments of Other Loans (112,000) (60,000)
Net Proceeds (Payments) of Stockholders' Loans 187,616 (40,399)
Net Proceeds of Bank Loans 1,135,000 -
Restriction of Cash (1,100,000) -
Deferred Costs in Connection with Public Offering - (186,216)
Deferred Private Placement Costs (225,787) -
Private Placement Advance 116,223 -
Principal Payments under Capital Lease Obligations (2,528) -
Sale of Common Stock 3,869,385 50,000
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,067,909 563,385
------------ ------------
NET (DECREASE) INCREASE IN CASH (118,203) 28,753
CASH, BEGINNING OF PERIODS 136,203 107,450
------------ ------------
CASH, END OF PERIODS $18,000 $136,203
------------ ------------
------------ ------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
Page 7
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------------
1995 1994
---- ----
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE FOR CASH FLOWS
CASH PAID DURING THE YEAR FOR :
Interest $85,427 $36,207
Taxes - -
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Issuance of Common Stock Purchase B Warrants
for Notes Receivable - $99,000
Issuance of Preferred Stock in Connection
with Bridge Financing - $487,500
Issuance of Common Stock Purchase A Warrants
in Connection with Bridge Financing - $24,000
Non Cash Expenses in Connection with Bridge
Financing - ($511,500)
Property Acquired Under Capital Lease ($131,573) -
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
Page 8
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BUSINESS ACTIVITY AND BASIS OF PRESENTATION
On February 1, 1994, Electronics Communications Corp. (the "Company") changed
its name from Genetic Breeding, Inc. to Internow Affiliates, Inc. and then to
Electronics Communications Corp. Effective on January 1, 1994, the Company
acquired Free Trade Distributors, Inc. (which engages in the wholesale
distribution of cellular telephones and related accessories and electronic
automobile and office products) and Trade Zone Distributors, Inc. (which engages
in the activation of cellular radio subscribers for commissions, both serving
the New York metropolitan area) in a business combination accounted for as a
reverse acquisition (the "Acquisition"). Accordingly, the historical financial
statements of Free Trade Distributors, Inc. and Trade Zone Distributors, Inc.
(the "Operating Entities" or "Acquirers") are included in the consolidated
statements of operations for the periods prior to the Acquisition. The assets
acquired and the liabilities assumed were recorded at cost. Historical
Stockholders' Equity of the Operating Entities has been retroactively restated,
as set forth in Note 2, in that the number of shares of common stock received in
the Acquisition, after adjustment of the par value of the Company's and the
Acquirers' common stock with an offset to additional paid-in capital. Retained
earnings (deficiency) of the Acquirers were carried forward.
In February 1995, the Company formed Electrocomm Wireless, Inc., a Delaware
corporation as a subsidiary, to become a radio paging and two-way radio carrier
in the New York City 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. The Company has posted a bid deposit of $1,000,000.
(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. and Personal Communications Network, 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 years ended
December 31, 1995 and 1994 was $49,965 and $11,551, respectively.
(D) INVENTORIES
Inventories are valued at the lower of cost or market, cost is determined using
the first in, first out method.
<PAGE>
Page 9
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
(E) REVENUE RECOGNITION
It is the Company's policy to categorize revenue into either sales from
electronic goods or commissions for fees earned on sales of cellular radio
service contracts. Sales from electronic goods includes but is not limited to
cellular phones and related accessories and other electronic automobile and
office products. Revenue from the above mentioned products are recognized when
they are shipped. Revenues from sales of electronic goods represented 57% of the
Companies total revenue in 1995 and 1994. 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 and 1994. 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. The
Company also received co-op fees which the cellular radio supplier applied as
payment for cellular products in 1994. These fees were recorded as additional
commission revenue in the amount of $129,267.
(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
<PAGE>
Page 10
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
NOTE 2 - ACQUISITION, RECAPITALIZATION AND PUBLIC OFFERING - (CONTINUED)
recapitalization of these shares resulted in a transfer from common stock to
additional paid-in capital in the amount of $1,000. As a result of the reverse
acquisition, additional paid-in capital was also reduced by $13,354 on January
1, 1994 (the effective date of the acquisition). This is reflective of the
excess liabilities assumed over the assets by the Operating Entities. On January
1, 1994, the Company sold 340,000 shares of its common stock for $50,000. All
references in the financial statements and notes thereto to the number of shares
outstanding have been restated to reflect the 1 for 5 reverse common stock split
described below. Additionally, On May 25, 1995, 47,611 shares were issued to a
shareholder who did not receive the proper allocation when the company had its
reverse common split in Note 2B.
(B) On May 12, 1995 the Company successfully completed a public offering (the
"Offering"). The Company sold 1,000,000 shares of Common Stock and 2,000,000
Common Stock Purchase Warrants at an initial offering price of $5.00 per share
and $.10 per Warrant. In order to complete this transaction the Board approved a
1 for 5 reverse common stock split, in order to reduce the authorized Common
Stock from 42,000,000 shares to 8,400,000 shares and increase the par value of
the shares from $.01 to $.05. The Company also registered 1,000,000 shares of
common stock owned by certain officers, directors and stockholders. In addition,
the Company granted the Underwriter an option to purchase up to 100,000 shares
of Common Stock and 200,000 Common Stock Purchase Warrants. On September 12,
1995 the Underwriter exercised the over-allotment option to purchase an
additional 300,000 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.
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts Receivable consist of amounts due for sales of electronic goods and
commissions due from major cellular radio suppliers. Components of Accounts
Receivable are $997,309 for the sale of electronic goods and $623,831 for
commissions at December 31, 1994 and $1,503,303 and $782,473 at December 31,
1995.
NOTE 4 - OTHER ASSETS
(A) Deferred Financing Costs were fully amortized in 1995 due to the repayment
of the Bridge Notes on May 19, 1995. The following costs were associated with
the Bridge Notes described in Note 7B:
240,000 shares of Preferred Stock $487,500
480,000 Warrants 24,000
Investment Banking Fees 104,000
Legal Fees 40,000
--------------
$655,500
Less: Amortization in 1994 (48,557)
--------------
Balance at December 31, 1994 $606,943
Less: Amortization in 1995 (606,943)
--------------
Balance at December 30, 1995 -0-
--------------
--------------
(B) Deferred offering costs consisted of certain legal, accounting, printing
fees and other costs in connection with the public offering described in
Note 2B. Those costs, together with any additional costs incurred in
connection with the offering were recorded as a reduction of the proceeds
received from the sale of the securities offered.
<PAGE>
Page 11
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
NOTE 4 - OTHER ASSETS - (CONTINUED)
(C) Deferred private placement costs consist of certain legal, accounting,
printing fees and other costs in connection with the private placement described
in Note 20B. Those costs, together with any additional costs incurred in
connection with the placement will be recorded as a reduction of the proceeds to
be received from the sale of the securities offered.
(D) 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. The licenses when put
into service will be amortized over a fifteen year period.
NOTE 5 - LOAN RECEIVABLE
The Loan Receivable consists of a $550,000 secured loan issued in conjunction
with the negotiations described in Note 20A.
NOTE 6 - BID DEPOSIT
The Company is participating in a Federal Communications Commission (the FCC)
auction for Personal Communication Services licenses. The FCC required an
advance payment in the amount of $1,000,000 which is fully refundable in the
event the Company is not the highest bidder.
NOTE 7 - NOTES PAYABLE
Notes Payable consist of the following:
(A) Notes Payable-Other in the amount of $140,000 at December 31, 1994, and
$28,000 at December 31, 1995 with interest at 9% and 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.
(B) Notes Payable-Bridge Financing consisted of an aggregate of $800,000, 12%
promissory notes, with principal and interest due on the earlier of the closing
of the Public Offering or November 1, 1995. Payment of the notes were secured by
a security interest in the Company's accounts receivable, a pledge of the shares
of Common Stock of the Company owned by its officers, directors and certain
stockholders, and was guaranteed by the Company's President. In connection with
the bridge financing the Company issued to the investors an aggregate of 240,000
shares of Series A Preferred Stock (the "Preferred Stock") and 480,000 Series A
Preferred Stock Purchase Warrants (the "Preferred Warrants") with a Fair Value
of $511,500. Each investor exchanged their Preferred Stock and Preferred
Warrants into an identical number of shares of Common Stock and Class A
Redeemable Common Stock Purchase Warrants on the effective date of the Offering.
These notes were paid on May 19, 1995.
(C) On April 18, 1995, the Company entered into a financing agreement with a
bank in the amount of $100,000. This loan is personally guaranteed by the
Company's President, cross corporate guaranteed by Free Trade and secured by the
Company's inventory. Interest is payable monthly at the rate of 1.5% per annum
in excess of the bank's fluctuating prime lending rate. As of the date hereof,
the interest rate was 10.5%. The loan becomes due and payable on April 18, 1996.
At December 31, 1995 the balance on this loan was $75,000.
(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
<PAGE>
Page 12
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
NOTE 7 - NOTES PAYABLE - (CONTINUED)
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.
(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.
NOTE 8 - 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 December 31,
1995 and 1994.
NOTE 9 - CAPITAL LEASE
Capital Leases include $131,576 for equipment. Minimum future lease payments
under capital leases as of December 31, 1995 for each of the next five years and
in the aggregate are:
1996 $50,244
1997 50,244
1998 50,244
1999 50,244
2000 38,334
-------------
Total Minimum Lease Payments 239,310
Less: Amount Representing Interest (110,265)
-------------
Present Value of Net
Minimum Lease Payments 129,045
Less: Current Maturities
included in Current Liabilities (50,244)
-------------
Long Term Obligations Under
Capital Leases $78,801
-------------
-------------
The interest rate on the capitalized lease is 29.17% and is 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 10 - OTHER ADVERTISING AND PROMOTIONAL SERVICES
On July 21, 1995, the Company entered into an Advertising and Promotional
Services Agreement, pursuant to which the Company agreed to issue 200,000 shares
of its Common Stock, $.05 par value, in exchange for services provided to the
Company. These services included analysis, advice, advertising and promotional
ideas and marketing campaign in connection with the Company's development of its
distribution of cellular products in South America. The Company issued the stock
to the consultant on August 8, 1995 which resulted in a non-cash expense of
$1,075,000 in the year ending December 31, 1995.
<PAGE>
Page 13
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
NOTE 11 - EARNINGS PER COMMON SHARE
The Company computes earning (loss) per common share by dividing the net income
(loss) by the weighted average number of shares of common stock, as
retroactively adjusted to reflect shares issued for the business combination
described in Note 1A and the 1 for 5 reverse common stock split described in
Note 2A, and common stock equivalents outstanding during the period.
NOTE 12 - CONVERTIBLE PREFERRED STOCK
A summary of the outstanding preferred stock at December 31, 1994 is as follows:
Additional
Series Shares Par Value Paid-In Capital
- ------ ------ ----------- ---------------
Series A 240,000 $2,400 $485,100
The holders of preferred stock were entitled to non-cumulative dividends as
declared by the Board of Directors at the rate of 7% per annum. No dividends had
been declared or were payable at December 31, 1994.
The Series A Preferred Stock was issued in connection with the Bridge Financing
described in Note 7B. On May 19, 1995, the holders of preferred stock have
exchanged the 240,000 shares of Series A Preferred Stock for 240,000 shares of
Common Stock. As a result of the conversion, additional paid-in capital was
reduced by $9,600.
NOTE 13 - WARRANTS TO PURCHASE COMMON STOCK
The Company approved the sale to certain officers, directors and stockholders of
1,000,000 Common Stock Purchase B Warrants at a price of $.10 per Warrant,
exercisable at $5.00 per share. On November 30, 1994, the Company issued 990,000
Common Stock Purchase B Warrants for $.10 per Warrant, payable by the Company
accepting promissory notes bearing interest at 8% per annum due on the earlier
of the exercise of the Warrants, or December 1, 1996. On January 20, 1995, the
Company agreed to reduce the exercise price of 300,000 B Warrants from $5.00 to
$2.50 and amended the exercise period of these 300,000 B Warrants so that they
are not exercisable until February 1, 1996.
NOTE 14 - INCOME TAXES
The Company adopted the liability method of accounting for income taxes, as set
forth in Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes." Under the liability method, deferred taxes are determined based
on the differences between the financial statement and tax basis of assets and
liabilities at enacted tax rates in effect in the years in which the differences
are expected to reverse. The Company has net operating loss carryforwards that
it does not expect to utilize pursuant to Internal Revenue Regulations. Prior
to the Acquisition, the Operating Entities elected to file Federal income tax
returns as small business corporations under Section 1362 of the Internal
Revenue Code (S-Corporations). Under this election the Operating Entities were
not subject to Federal income taxes, but were subject to New Jersey State income
taxes.
<PAGE>
Page 14
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
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
the Mr. Les Winder, which was amended on October 1, 1995. The term of the
agreement is for five years with an option for an 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
During the year ended December 31, 1994 and 1995 Free Trade Distributors, Inc.
purchased 100% of its cellular telephones and related accessories from four
major suppliers and Trade Zone Distributors, Inc. received 100% of its income
from two cellular radio suppliers.
NOTE 17 - OPERATING LEASE
In early 1994, the Company leased office and warehouse space under an
operating lease agreement on a month to month basis. The rental expense for
the period ended December 31, 1995 and December 31, 1994 was $64,379 and
$47,130 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 15
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
NOTE 17 - OPERATING LEASE - (CONTINUED)
The minimum future rental payments under this non-cancelable operating lease for
each of the remaining years are:
1996 $ 60,000
1997 60,000
1998 60,000
1999 25,000
-------------
Total Minimum Future
Rental Payments $205,000
-------------
-------------
NOTE 18 - AMENDMENT TO CERTIFICATE OF INCORPORATION
On September 27, 1994, the Board of Directors authorized the amendment of the
Company's Certificate of Incorporation to authorize the issuance of 8,000,000
shares of preferred stock and increase its authorized shares of common stock to
42,000,000. The transaction became effective on November 21, 1994. The amendment
was adopted in order to facilitate a contemplated public offering, the material
terms of which are described in Note 2B.
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 - SUBSEQUENT EVENTS
(A) As of December 31, 1995, the Company has loaned $550,000 to Threshold
Communications, Inc. ( "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.
<PAGE>
Page 16
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
NOTE 20 - SUBSEQUENT EVENTS - (CONTINUED)
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 to TCI and has guaranteed certain obligations
in the amount of $739,000 for TCI. As of the date hereof, the Company has not
entered into an agreement as to an acquisition or investment in TCI.
On November 1, 1995, the Company entered into an agreement (the "Agreement")
with TCI which superseded a prior agreement between the parties. Under the
Agreement, in consideration of the aforesaid advances and qaurantees , 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.
There can be no assurance that the Company will be able to reach an agreement
with TCI as to an acquisition of or investment in TCI. If it does, which cannot
be deemed to be probable at this time, there can be no assurance as to the terms
of any such agreement. If the Company obtains ownership of TCI, the Company will
own the lease to the radio paging transmission facility and the aforesaid
subscriber base and related assets which the Company intends to use in the
conduct and expansion of its business.
(B) 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.
(C) 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.
(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. The
Company has agreed to the Placement Agent a placement fee equal to 10% of the
gross proceeds, a 2% non-accountable expense allowance and to issue 200,000
<PAGE>
Page 17
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
NOTE 20 - SUBSEQUENT EVENTS - (CONTINUED)
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.
(E)On March 4, 1996 the Company commenced an action entitled Electronics
Communications Corp. as Plaintiff against Toshiba America Consumer Products,
Inc. ("Toshiba") and Audiovox Corporation, case number 96 Civ. 1565 in United
States District Court, Southern District of New York. The complaint asserts
claims for antitrust, breach of contract, tortious interference with contract
and tortious interference with prospective economic advantage and business
relations. The complaint seeks damages in excess of $ 5,000,000. This action was
commenced because the Company expended significant monies and resources
including the issuance of 200,000 shares of the Company's Common Stock to a
consultant in anticipation of South American cellular telephone program which
the Company was to undertake exclusively of behalf of Toshiba. Immediately prior
to the commencement of the program, Toshiba discontinued manufacturing the line
of cellular telephones that the program was designed to offer. This unilateral
decision has caused significant damages to the Company and the Company will
vigorously prosecute this claim.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed by
the undersigned, thereunto duly authorized.
Dated: January 22, 1997 ELECTRONICS COMMUNICATIONS CORP.
By: /s/ William S. Taylor
------------------------------
William S. Taylor,
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on behalf of the Registrant and in capacities and at the
dates indicated:
SIGNATURE CAPACITY DATE
- --------- -------- ----
/s/ William S. Taylor Chairman of the Board, January 22, 1997
- --------------------- Chief Executive Officer,
William S. Taylor President (Principal Executive
and Financial Officer)
/s/ Les Winder Executive Vice President, January 22, 1997
- --------------------- Treasurer and Director
Les Winder
/s/ Brenda Taylor Director and Secretary January 22, 1997
- ---------------------
Brenda Taylor
/s/ Andrew A. Miller Controller January 22, 1997
- --------------------
Andrew A. Miller
Director January __, 1997
- ---------------------
Mal Gurian
/s/ Robert DePalo Director January 22, 1997
- ---------------------
Robert DePalo
_____________________ Director January __, 1997
Ira J. Tabankin
