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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM 10-QSB / A-2
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended
March 31, 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.)
4 Madison 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: None
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 July 8, 1996, there were 4,134,294 shares of Common Stock, $.05 par value
outstanding.
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See Notes to Consolidated Financial Systems
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PAGE 1
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
MARCH 31, DECEMBER 31,
----------- ------------
1996 1995
---- ----
(UNAUDITED)
CURRENT ASSETS
Cash $54,329 $18,000
Restricted Cash 1,100,000 1,100,000
Accounts Receivable
(Net of $35,634 Allowance for Doubtful
Accounts at March 31, 1996 and
$80,987 at December 31, 1995.) 1,276,394 2,204,789
Inventories 550,099 476,796
Bid Deposit 1,000,000 1,000,000
Loan Receivable 1,114,000 550,000
Prepaid Expenses 82,588 78,849
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TOTAL CURRENT ASSETS 5,177,410 5,428,434
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PROPERTY AND EQUIPMENT
Property and Equipment 454,755 335,858
Accumulated Depreciation (86,483) (75,544)
---------- ----------
NET PROPERTY AND EQUIPMENT 368,272 260,314
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OTHER ASSETS
Deferred Private Placements Costs 364,144 225,787
Deferred License Costs 306,410 293,810
Security Deposits and Other Assets 99,195 38,313
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TOTAL OTHER ASSETS 769,749 557,910
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TOTAL ASSETS $6,315,431 $6,246,658
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See Notes to Consolidated Financial Statements
<PAGE>
PAGE 2
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
----------- ------------
1996 1995
---- ----
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES
Accounts Payable $1,274,178 $1,783,344
Notes Payable - Other 139,000 28,000
Notes Payable - Bank 1,160,000 1,225,000
Notes Payable - Stockholders 193,948 252,007
Current Portion of Obligations Under Capital Leases 69,180 50,244
Private Placement Advance - 116,223
Accrued Expenses and Taxes Payable 387,279 248,764
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TOTAL CURRENT LIABILITIES 3,223,585 3,703,582
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LONG TERM LIABILITIES
Obligations under Capital Leases 87,794 78,801
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STOCKHOLDERS' EQUITY
Common Stock, par value $.05 per share, 40,000,000
authorized, issued and outstanding 3,267,657
at March 31, 1996 and 3,003,697 at December 31, 1995 163,383 150,186
Additional Paid-In Capital 5,886,423 5,320,629
Retained (Deficit) (3,020,053) (2,947,539)
Notes Receivable arising from Common Stock Purchase
Warrants Sold (25,701) (59,001)
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TOTAL STOCKHOLDERS' EQUITY 3,004,052 2,464,275
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,315,431 $6,246,658
---------- ----------
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</TABLE>
See Notes to Consolidated Financial Statements
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PAGE 3
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED (DEFICIT)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1996 1995
---- ----
<S> <C> <C>
SALES
Electronics $983,728 $906,826
Commissions 1,279,798 695,938
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TOTAL SALES 2,263,526 1,602,764
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COST OF SALES
Electronics 827,816 742,665
Commissions 889,435 566,931
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TOTAL COST OF SALES 1,717,251 1,309,596
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GROSS PROFIT 546,275 293,168
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EXPENSES
Selling 134,128 106,069
General and Administrative 387,128 176,785
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TOTAL EXPENSES 521,256 282,854
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OPERATING INCOME BEFORE OTHER EXPENSES
AND INCOME TAXES 25,019 10,314
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OTHER EXPENSES
Interest Expense - Net 23,762 24,306
Amortization of Bridge Financing Costs - 163,750
Accelerated Amortization of Bridge Financing Costs - 229,235
Settlement of Potential Litigation 73,769 -
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TOTAL OTHER EXPENSES 97,531 417,291
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INCOME (LOSS) BEFORE INCOME TAXES (72,512) (406,977)
Income Taxes - -
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NET INCOME (LOSS) ($72,512) ($406,977)
RETAINED (DEFICIT), BEGINNING OF PERIOD ($2,947,539) ($318,580)
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RETAINED (DEFICIT), END OF PERIOD (3,020,051) (725,557)
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LOSS PER COMMON SHARE ($0.02) ($0.27)
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AVERAGE COMMON SHARES OUTSTANDING (NOTE 11) 3,082,318 1,516,086
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</TABLE>
See Notes to Consolidated Financial Statements
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PAGE 4
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) ($72,512) ($406,977)
Adjustments to Reconcile Net Income (Loss) to
Net Cash Used By Operations:
Depreciation and Amortization 10,939 401,120
Non Cash Other Expense 73,769 -
Changes in:
Accounts Receivable 928,392 255,238
Inventories (73,303) 219,100
Prepayments (3,739) (45,235)
Accounts Payable (509,166) (511,137)
Accrued Expenses and Taxes Payable 138,515 87,117
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TOTAL ADJUSTMENTS 565,407 406,203
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NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES 492,895 (774)
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CASH FLOWS FROM INVESTING ACTIVITIES
Loan Receivable (564,000) -
Other Assets (60,882) -
Deferred License Costs (12,600) -
Additions to Property and Equipment (86,639) (4,506)
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NET CASH PROVIDED (USED) BY (724,121) (4,506)
INVESTING ACTIVITIES ---------- ----------
CASH FLOWS FROM FINANCING
ACTIVITIES
Net Proceeds (Payments) of Shareholder Loans (24,759) 63,823
Deferred Costs in Connection with Public Offering - (145,339)
Deferred Private Placement Costs (138,357) -
Payments of Bank Loans (65,000) -
Proceeds of Other Loans 134,000 (5,000)
Payments of Other Loans (23,000) -
Principal Payments of Capital Lease Obligations (4,329) -
Sale of Common Stock 389,000 -
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NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 267,555 (86,516)
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NET INCREASE (DECREASE) IN CASH 36,329 (91,796)
CASH, BEGINNING OF PERIODS 18,000 136,203
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CASH, END OF PERIODS $54,329 $44,407
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</TABLE>
See Notes to Consolidated Financial Statments
<PAGE>
PAGE 5
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
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1996 1995
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SUPPLEMENTAL DISCLOSURE FOR CASH FLOWS
CASH PAID DURING THE PERIOD FOR :
Interest $3,184
Taxes - -
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Property Acquired Under Capital Lease (32,258) -
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 February 1995, the Company formed a new subsidiary, 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
pagering 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. 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.
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 three months ended March 31, 1996
are not necessarily indicative of the results that may be expected for
the year ended December 31, 1996. The unaudited consolidated financial
statements should be read in conjunction with the consolidated financial
statements and footnotes thereto included in the Company's annual report
on form 10-SB for the year ended December 31, 1995.
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PAGE 7
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
(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 three months ended March 31, 1996 and 1995 was
$10,939 and $8,008, 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 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.
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-backschargebacks 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.
(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.
<PAGE>
PAGE 8
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
(G) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the period. Actual results could differ from those estimates.
NOTE 2 - ACQUISITION, RECAPITALIZATION AND PUBLIC OFFERING
(A) As described in Note 1, the Company acquired all of the outstanding
common stock of the Operating Entities. For accounting purposes the
acquisition has been treated as a recapitalization of the Operating
Entities with the Operating Entities as the Acquirers (reverse
acquisition). The historical financial statements prior to January 1,
1994 are those of the Operating Entities. As a result of this
transaction, historical additional paid-in capital of the Operating
Entities was retroactively reduced and common stock increased by $58,804
for the par value of the 1,176,086 shares of common stock received in
the transaction. Prior to the acquisition, Free Trade Distributors, Inc.
had 200 shares outstanding at $75 par value or $15,000 in common stock
and $60,000 in additional paid-in capital. The recapitalization of these
shares resulted in a transfer from common stock to additional paid-in
capital of $15,000. In 1993, Trade Zone Distributors, Inc. was
capitalized and issued 200 shares of $5 par value or $1,000 in common
stock. The recapitalization of these shares resulted in a transfer from
common stock to additional paid-in capital in the amount of $1,000. As a
result of the reverse acquisition, additional paid-in capital was also
reduced by $13,354 on January 1, 1994 (the effective date of the
acquisition). This is reflective of the excess liabilities assumed over
the assets by the Operating Entities. On January 1, 1994, the Company
sold 340,000 shares of its common stock for $50,000. All references in
the financial statements and notes thereto to the number of shares
outstanding have been restated to reflect the 1 for 5 reverse common
stock split described below. Additionally, On May 25, 1995, 47,611
shares were issued to a shareholder who did not receive the proper
allocation when the company had its reverse common split in Note 2B.
(B) On May 12, 1995 the Company successfully completed a public offering
(the "Offering").The Company sold 1,000,000 shares of Common
Stock and 2,000,000 Common Stock Purchase Warrants at an initial
offering price of $5.00 per share and $.10 per Warrant. In order to
complete this transaction the Board approved a 1 for 5 reverse common
stock split, in order to reduce the authorized Common Stock from 42,000,000
shares to 8,400,000 shares and increase the par value of 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 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.
<PAGE>
PAGE 9
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - ACQUISITION, RECAPITALIZATION AND PUBLIC OFFERING - (Continued)
(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 an
other expense.
(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 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 May 13, 1996 the Company has received $1,250,000 in
connection with this transaction.
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 $995,3681,0 for the sale of electronic goods and
$316,660 for commissions at March 31, 1996 and $1,503,303 and $782,473
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. Those costs, together with any
additional costs incurred in connection with the placement will be
recorded as a reduction of the proceeds to be received from the sale of
the securities offered.
(B) Deferred License Costs consists of various legal, consulting and
registration fees in connection with obtaining paging licenses, two-way
radio licenses and 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.
<PAGE>
PAGE 10
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - LOAN RECEIVABLE
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.
On March 22, 1996, TCI has entered into an agreement to acquire
approximately 6,000 paging service subscribers and other related assets.
The Company has advanced and additional $175,000 in cash and $389,000 in
Common Stock to TCI and has guaranteed certain obligations in the amount
of $739,000 for TCI. As of the date hereof, the Company 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 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.
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.
NOTE 6 - BID DEPOSIT
The Company had participated in a Federal Communications Commission (the
FCC) auction for Personal Communication Services licenses. The FCC
required an advance payment in the amount of $1,000,000 which is fully
refundable in the event the Company is not the highest bidder. On May 8,
1996 the Company obtained six PCS licenses entitling it to operate
wireless PCS telephone systems covering nearly 1.5 million people in
three states.
<PAGE>
PAGE 11
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 March 31, 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.
(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 public oOffering 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 investor 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 Bridge 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. On
March 31, 1996 the balance on this loan was $60,000. This note was
temporally extended by the bank. The Company is currently in
negotiations with the bank to increase the credit line and extend the
due date.
(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 becomes due and payable on July 6, 1996.
(E) On December 22,1995, the Company entered into a lending arrangement
with a bank. In connection therewith, the Company borrowed $450,000 at
an interest rate of 1% above the bank's base lending rate, payable in
ninety days. At December 31, 1995, the interest rate was 9.75%. The
Company deposited a $400,000 three month certificate of deposit with the
bank as collateral for such loan. The Certificate earns a 5% interest.
The loan is also secured by certain officers' and directors' personal
guarantees and inventory. On March 22, 1996 the bank extended the due
date 90 days. The note becomes due on June 22, 1996..
(F) 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.
<PAGE>
PAGE 12
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - CAPITAL LEASE
Capital Leases include $163,834 for equipment. Minimum future lease
payments under capital leases as of March 31, 1996 for each of the next
five years and in the aggregate are:
1996 $56,052
1997 69,181
1998 51,801
1999; 50,244
2000 38,334
---------
Total Minimum Lease Payments 265,612
Less: Amount Representing Interest (108,638)
---------
Present Value of Net
Minimum Lease Payments 156,974
Less: Current Maturities
included in Current Liabilities (69,180)
---------
Long Term Obligations Under
Capital Leases $87,794
---------
---------
The interest rates on the capitalized leases rage from 16.909 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 March 31, 1996 and December 31, 1995.
NOTE 10 - OTHER ADVERTISING AND PROMOTIONAL SERVICES
On July 21, 1995, the Company entered into an Advertising and
Promotional Services Agreement, pursuant to which the Company agreed to
issue 200,000 shares of its Common Stock, $.05 par value, in exchange
for services provided to the Company. These services included analysis,
advice, advertising and promotional ideas and marketing campaign in
connection with the Company's development of its distribution of
cellular products in South America. The Company issued the stock to the
consultant on August 8, 1995 which resulted in a non-cash expense of
$1,075,000 in the year ending December 31, 1995.
NOTE 11 - EARNINGS PER COMMON SHARE
The Company computes earning (loss) per common share by dividing the net
income (loss) by the weighted average number of shares of common stock,
as retroactively adjusted to reflect shares issued for the business
combination described in Note 1A and the 1 for 5 reverse common stock
split described in Note 2A, and common stock equivalents outstanding
during the period.
NOTE 12 - CONVERTIBLE PREFERRED STOCK
The Series A Preferred Stock was issued in connection with the Bridge
Financing described in Note 7B. On May 19, 1995, the holders of
preferred stock have exchanged the 240,000 shares of Series A Preferred
Stock for 240,000 shares of Common Stock. As a result of the conversion,
additional paid-in capital was reduced by $9,600.
<PAGE>
PAGE 13
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 the Internal Revenue Regulations.
NOTE 15 - CONTINGENT LIABILITIES
(A) On December 1, 1994, the Company entered into an employment
agreement with the President of the Company for a term of five years
with an option for an additional three one year terms. The agreement
provides for annual compensation of $150,000 during the term of the
employment agreement and entitles the President to certain fringe
benefits, including automobile maintenance, disability insurance,
medical benefits and life insurance coverage. The President has agreed
that during the term of his agreement and for 12 months thereafter
(unless the agreement is terminated without cause), he will be subject
to non-competition provisions. Upon termination of employment without
cause, the President will be entitled to a lump sum payment of $75,000
multiplied by the number of years of his employment by the Company.
(B) The Company has engaged a management company, which is an affiliate
of the Underwriter used in the Public Offering described in Note 2B, as
the Company's management consultant, for a period of 15 months
commencing December 14, 1994, at a fee of $75,000 (exclusive of
out-of-pocket expenses), which was paid on May 12, 1995. In addition,
the Company has agreed, subject to any required regulatory approvals, to
pay the Representative a finder's fee, in the event that the
Representative originates within five years following the Effective Date
of the offering a merger, acquisition, joint venture or other
transaction to which the Company is party, in the amount equal to 5% of
the first $4,000,000, 4% of the next $1,000,000, 3% of the next
$1,000,000 and 2% of the excess, if any, over $6,000,000 of the
consideration actually received by the Company in any such transaction.
(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.
<PAGE>
PAGE 14
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - CONTINGENT LIABILITIES - (Continued)
(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
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 March 31, 1996 and March 31, 1995 was
$24,682 and $17,871 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.
The minimum future rental payments under this non-cancelable operating
lease for each of the remaining years are:
1996 $ 45,000
1997 60,000
1998 60,000
1999 25,000
---------
Total Minimum Future
Rental Payments $190,000
---------
---------
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.
<PAGE>
PAGE 15
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 would be are available
for grants to officers, directors, consultants and key employees of the
Company. The Plan provides for the grant of incentive stock options,
non-qualified stock options and Director's options. The Plan will
terminate in 2004, unless sooner terminated by the Board of Directors.
As a result of the reverse split the Board of Directors, with stockholders
approval, increased the number of shares of Common Stock, after the
effective date of the reverse split, which may be subject to options
granted under the Plan from 100,000 to 300,000. On July 10, 1995 the
Company issued 20,000 options to a director of the Company at a price
of $3.80, 5,000 of these options were exercisable immediately, 5,000 on
July 10, 1996, 5,000 on July 10, 1997 and 5,000 on July 10,1998 and
expire on July 10, 2,000. The fair value of the stock was less than the
option price therefore no compensation expense was recognized in 1995.
NOTE 20 - PENDING LITIGATION
On March 4, 1996 the Company commenced an action entitled Electronics
Communications Corp. as Plaintiff against Toshiba America Consumer
Products, Inc. ("Toshiba") and Audiovox Corporation, case number 96 Civ.
1565 in United States District Court, Southern District of New York. The
complaint asserts claims for antitrust, breach of contract, tortious
interference with contract and tortious interference with prospective
economic advantage and business relations. The complaint seeks damages
in excess of $ 5,000,000. This action was commenced because the Company
expended significant monies and resources including the issuance of
200,000 shares of the Company's Common Stock to a consultant in
anticipation of South American cellular telephone program which the
Company was to undertake exclusively of behalf of Toshiba. Immediately
prior to the commencement of the program, Toshiba discontinued
manufacturing the line of cellular telephones that the program was
designed to offer. This unilateral decision has caused significant
damages to the Company and the Company will vigorously prosecute this
claim.
NOTE 21 - CORRECTION OF AN ERROR
The accompanying financial statements have been restated to give effect
to adjustments arising from the issuance of 34,715 shares to avoid
potential litigation as described in Note 2C. The effect of the
restatement was to decrease Net Income for the three months ended March
31, 1996 by $73,769 ($.02 loss per share), decrease Retained Earnings by
$73,769, increase Common Stock by $1,736 and increase Additional Paid-In
Capital by $72,003.
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1995
During the three months ended March 31, 1996 revenues from sales increased
$660,762 or 41.2% compared to the same period in 1995. Electronic equipment
sales increased $76,902, activation commissions and residual income increased
during the period by approximately $583,860 or approximately 83.9%. The small
increase in electronic equipment sales was consistent with the sales for the
same period in 1995. However, the Company sold a greater percentage of
communication equipment, versus home/office equipment in this quarter compared
to last year. The increase in commissions was due to increased activations of
cellular telephone numbers, as a direct result of an advertising campaign for
the Company's direct sales division and an increase in residuals as a result of
the Company's larger subscriber base with Bell Atlantic/Nynex Mobile.
Cost of electronic equipment sales increased $85,151 compared to the same
period in 1995, as a result of higher overall sales of electronic equipment.
Gross profit from electronics equipment sales decreased approximately 2.3% from
18.1% to 15.8% during the same period in 1996. The decrease in gross profit was
due to greater sales of communications equipment which the Company generally
sells at a lower gross profit margin. The Company does not rely on any one
major equipment supplier, however, during the quarter the Company purchased 100%
of its cellular phones from four suppliers, the loss of any one of them would
have a negative impact on the Company.
Cost of activation commissions and residual income increased $322,504
compared to the same period in 1995, due to an increase in revenues. The gross
profit percentage related to these sales increased approximately 12% from 18.5%
for the three months ended March 31, 1995 versus 30.5% for the three months
ended March 31, 1996 as a result of greater sales from the Company direct sales
division.
Selling expenses increased approximately $28,000 for the three months ended
March 31, 1996 as compared to the same period in 1995 due to increased
advertising and sales commissions paid during the same comparative periods.
General and administrative expenses increased approximately $210,000 for the
three months ended March 31, 1996 as compared to the same period in 1995. This
increase is due to a larger number of employees, higher office and warehouse
rental payments and increased legal and accounting expenses compared to the same
period of the prior year.
<PAGE>
The Company had a net operating profit before other expenses and income
taxes of $25,019 for the three months ended March 31, 1996 compared to a profit
of $10,314 for the three months ended March 31, 1995.
Interest expenses remained constant compared to the same period in 1995.
The Company did experience a one time non-cash expense of $73,769 relating to
the issuance of 34,715 shares of the Company's Common Stock to avoid potential
litigation. However, the Company did not experience any additional non-cash
financing costs, comparable to those incurred in 1995 as a result of the
Company's Bridge Financing completed in December 1994
LIQUIDITY AND CAPITAL RESOURCES
The operations of the Company's subsidiaries since inception in 1991
to date have been funded principally from cash flow from operations, capital
investments and loans from officers, directors, principal stockholders and third
parties. Although the officers and directors of the Company have provided the
financial accommodations to the Company in the past, there can be no assurance
that they will continue to do so in the future. In addition, the Company has a
$100,000 revolving line of credit with a bank. This loan is personally
guaranteed by the Company's President and a cross corporate guaranty of Free
Trade and secured by the Company's inventory. As of March 31, 1996, there was
an outstanding balance under this loan of $60,000 with interest payable monthly
at the rate of 1.5% per annum in excess of the bank's fluctuating prime lending
rate. As of March 31, 1996, the interest rate was 10.5%. This loan was due and
payable on April 18, 1996, however, this loan has been temporarily extended by
the bank. The Company is currently negotiating with the bank to increase the
credit line and extend the maturity date of the loan.
On October 6, 1995 the Company entered into a lending arrangement with a
bank. In connection therewith, the Company can borrow up to $700,000 at an
interest rate of 3/4% above the bank's base loan rate. As of March 31, 1996,
the interest rate was 9.5%. The Company deposited a $700,000 three month
certificate of deposit with the bank as collateral for such loan. The
certificate of deposit earns 5% interest. The loan is also secured by certain
officers' personal guarantees, 245,000 shares of their stock and all of the
assets of the Company. On January 6, 1996 and then again on April 6, 1996 the
bank extended the due date 90 days. The note becomes due and payable on July 6,
1996.
On December 22, 1995, The Company entered into a lending arrangement with a
bank. In connection therewith, the Company borrowed $450,000 at an interest
rate of 1% above the bank's base lending rate, payable in ninety days. On March
31, 1996, the interest rate was 9.75%. The Company deposited a $400,000 three
month certificate of deposit with the bank as collateral for such loan. The
Certificate earns 5% interest. The loan is also secured by certain officers'
and directors', personal guarantees and the Company's inventory. On March 22,
1996 the bank extended the due date 90 days. The note becomes due on June 22,
1996.
<PAGE>
On March 31, 1996, the Company had working capital of $1,953,825, as
compared to a working capital of approximately $1,724,852 at December 31, 1995.
Included in the working capital is $1,100,000 which has been deposited with
the bank as collateral for the above described loans.
The Bridge Financing, completed in December 1994, consisted of $800,000 of
12% promissory notes which were due the earlier of closing of a public offering
or November 1, 1995 and the issuance of Common Stock and A Warrants. The
proceeds of the Bridge Financing were used to pay certain costs associated with
the public offering; to collateralize a letter of credit to one of the Company's
vendors, to make an initial investment for the Company's paging operations and
contribute to working capital. On May 19, 1995 the Company completed a public
offering resulting in gross proceeds of $5,200,000 and approximate net proceeds
of $4,200,000. The Company devoted substantial resources, including a portion
of the net proceeds of the public offering, after payment of the Bridge
Financing indebtedness, primarily to paging and two-way radio. The Company
will need to seek other forms of financing to build a PCS infrastructure.
As of March 31, 1996 the Company loaned $550,000 to Threshold
Communications, Inc. ("TCI"). TCI is engaged in the radio paging business. On
March 22, 1996 TCI acquired all of the assets and assumed certain liabilities of
General Communications and Electronics, Inc. ("GCE"). In connection therewith,
the Company advanced an additional $175,000 to TCI and guaranteed certain
obligations of TCI in the amount of $739,000. As a result of the transaction
with GCE, TCI, in addition to a paging transmission site which it previously
owned, became a paging reseller. TCI offers paging service primarily through
various paging carriers in the New York metropolitan area. TCI offers national
paging service through a sales and distribution agreement with Skytel. Under
this agreement, TCI pursues regional and national accounts through its present
dealer network in the Paging Service Area. As of the date hereof TCI has
approximately a 9000 person subscriber base. TCI also has the necessary
infrastructure to operate a paging operation, including but not limited to a
full service technical shop and repair facility, engineering capability,
marketing and sales force, billing and collection systems and ancillary product
support capability for paging related products. The Company is currently
negotiating the acquisition of TCI, however, there can be no assurance that the
Company will be able to reach an agreement with TCI. If the Company does
acquire TCI, it will utilize TCI's infrastructure in the operations of its own
paging system. TCI has recently acquired a paging carrier agreement with
Skytel, a company that provides nationwide paging, voice messaging and related
messaging services to subscribers and others. In addition, TCI owns a 900
megahertz FCC paging license in the Paging Service Area and hold a long-term
lease for a paging transmission site. A principal stockholder of TCI is a
stockholder of the Company.
On November 1, 1995 the Company acquired an exclusive option to purchase
TCI in consideration of the above mentioned loans. The option agreement further
provides that if, on or before January 31, 1996, the acquisition of TCI by the
Company or an investment in TCI is not consummated, the Company may demand
repayment of these advances. If the advances are not repaid within ten business
days of such demand, the Company, at its option, may foreclose on
<PAGE>
100% of the stock of TCI which was pledged as collateral for such advances. To
date, the Company has not made such a demand.
On January 16, 1996 the Company consummated a Private Placement of 69,460
shares of its Common Stock $.05 par value at a price of $2.25 per share. The
total offering resulted in gross proceeds of $156,217.50. Each subscriber, in
addition to the shares received demand registrations rights, which require the
Company to file a Registration Statement upon request of 25% or more of the
shares sold in the offering at anytime during the 18 month period commencing 30
days from the closing date. In March 1996, the subscribers demanded that the
Company file a Registration Statement covering their shares. The Company at
that time was unable to comply with the request. In order to avoid potential
litigation for failing to file a Registration Statement on a timely basis, the
Company issued an aggregate of 34,715 additional shares to the subscribers.
In light of the fact that the Company did not raise sufficient monies in
the above described Private Placement and had significant capital restricted
because of its deposit with the FCC and its collateral with its bank , the
Company was compelled on February 29, 1996, to borrow $134,000 from another
unrelated corporation. Interest is payable at the rate of 10% in monthly
installments of $1,117 per month. As additional consideration, the Company
issued to the corporation 800,000 A Warrants with 90 day registration rights and
"piggy back" registration rights.
On March 21, 1996, the Company entered into a letter of intent with an
investment banking firm (the "Placement Agent") Pursuant to which the Company
will offer $6,000,000 principal amount of the Company's Subordinated Convertible
Debentures (the "Debenture"). The principal amount of the Debentures shall be
convertible into shares of the Company's common stock at the option of the
holder, immediately upon issuance at a price equivalent to 25% discount from the
average high closing bid price for five days prior to the conversion or $1.50,
whichever is less. The Debenture bears interest at the rate of 5% per annum
payable on April 1 of each year commencing April 1, 1997. The Debentures are
redeemable and callable for conversion under certain circumstances. The
Debentures are also secured by certain officers and directors personal
guarantees.
The Company has agreed to the Placement Agent a placement fee equal to 10%
of the gross proceeds, a 2% non-accountable expense allowance, issue 200,000
Warrants to purchase the Company's common stock at $2.25 per share, and issue
1,350,000 Class A Warrants. The Company intends to use the proceeds of this
offering to increase its deposit in the PCS auction, and general working capital
purposes. As of May 13, 1996 the Company has received gross proceeds from this
offering of $1,250,000.
On May 8, 1996, the Company won six PCS licenses. The total winning bids
amounted to $26,452,200, after the 25% discount provided to small businesses,
which the Company qualifies for, under the terms of the auction. The Company
has deposited $1,.000,000 with the FCC and will pay an additional $1,645,220 or
an aggregate of 10% of the winning bids upon
<PAGE>
the grant of the license, which is anticipated very shortly. The Company will
use a portion of the proceeds of the above described offering to pay the balance
of the deposit.
The Company is seeking additional financing in the form of equipment
leasing, debt or equity financing utilization of vendor financing and joint
venture partners for the purchase of PCS equipment and for build-out of
infrastructure. There can be no assurance that such financing will be available
to the Company or if available, available upon acceptable terms.
IMPACT OF INFLATION
The Company is subject to normal inflationary trends and anticipates that
any increased costs would be passed on to its customers.
<PAGE>
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
