SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to __________
Commission File Number 1-13764
ELECTRONICS COMMUNICATIONS CORP.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 11-2649088
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10 Plog Road
Fairfield, New Jersey 07004
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 808-8862
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 [ ].
The number of shares of the registrant's common stock ($.60 par value)
outstanding as of November 17, 1997 was 4,052,576 shares (see Note 1).
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
INDEX
PART 1. FINANCIAL INFORMATION (UNAUDITED)
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets September 30, 1997, March 31,
1997 and December 31, 1996
Consolidated Statements of Operations for the three and six
months ended September 30, 1997 and 1996
Consolidated Statements of Cash Flows for the six months
ended September 30, 1997
Consolidated Statements of Changes in Stockholders' Equity
for the six months ended September 30, 1997
Notes to Consolidated Condensed Financial Statements
Item 2. Management's Discussion and Analysis
PART II. OTHER INFORMATION
Signature page
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<TABLE>
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ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
SEPTEMBER 30, MARCH 31, DECEMBER 31,
1997 1997 1996
------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS
Cash ........................................................... $ 127,725 $ 48,620 $ 179,188
Accounts Receivable
(Net of $466,774 Allowance for Doubtful
Accounts at September 30, 1997, $504,000
at March 31, 1997 and $574,910 at
December 31, 1996.) ......................................... 339,197 685,709 676,797
Inventories .................................................... 63,351 256,698 187,953
Loan Receivable ................................................ 114,560 114,560 114,560
Paging and Two-Way Radio Assets Held for Sale .................. 3,117,768
Prepaid Expenses ............................................... 109,202 6,158 12,162
------------ ------------ ------------
TOTAL CURRENT ASSETS .............................. 3,871,803 1,111,745 1,170,660
============ ============ ============
PROPERTY AND EQUIPMENT
Property and Equipment ......................................... 415,221 2,794,870 2,754,910
Accumulated Depreciation ....................................... (220,419) (778,502) (634,314)
------------ ------------ ------------
NET PROPERTY AND EQUIPMENT .............................. 194,802 2,016,368 2,120,596
============ ============ ============
OTHER ASSETS
PCS Licenses .................................................. 21,188,375 20,037,759 19,473,392
Marketing Service Contract ..................................... 673,459 1,027,911 1,205,137
Loan Origination Fees ......................................... -- 289,876 808,287
Paging Carrier Agreement ...................................... -- 962,835 980,022
Deferred Private Placements Costs .............................. -- 347,971 237,243
Deferred Debenture Costs ...................................... 325,000 -- --
Deferred PCS License Costs ..................................... 367,628 366,650 335,932
Security Deposits and Other Assets ............................. 139,850 126,945 160,795
Goodwill ...................................................... -- 63,459 66,202
Deferred Registration Costs ................................... 75,418 84,176 84,176
Deferred PCS Costs............................................. 24,616 19,050 --
------------ ------------ ------------
TOTAL OTHER ASSETS .............................. 22,794,346 23,326,632 23,351,186
============ ============ ============
TOTAL ASSETS .............................. $ 26,860,951 $ 26,454,745 $ 26,642,442
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
SEPTEMBER 30, MARCH 31, DECEMBER 31,
1997 1997 1996
------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CURRENT LIABILITIES
Accounts Payable ............................................... $ 3,103,605 $ 1,971,849 $ 1,956,329
Notes Payable - Other .......................................... 176,621 941,949 1,081,538
Current Portion of Bank Note ................................... 90,224 95,000 95,000
Current Portion of Obligations Under
Capital Leases ............................................... 837,165 234,885 234,885
Current Portion of Long Term Debt .............................. 46,277 8,793 8,793
Private Placement Advance ...................................... -- 1,628,254 500,000
Accrued Expenses ............................................... 227,491 1,002,617 552,005
Accrued Interest ............................................... 1,440,673 607,429 493,401
Customer Deposits .............................................. 22,854 23,929 24,009
------------ ------------ ------------
TOTAL CURRENT LIABILITIES .............................. 5,944,910 6,514,705 4,945,960
------------ ------------ ------------
LONG TERM LIABILITIES
Notes Payable to Stockholders .................................. 162,360 92,215 181,677
Notes Payable to FCC............................................ 16,792,258 16,482,516 16,348,771
Long Term Debt ................................................. -- 41,879 43,971
Obligations under Capital Leases ............................... -- 682,377 745,639
8% Cumulative Convertible Debentures ........................... 4,513,093 -- --
------------ ------------ ------------
TOTAL LONG TERM LIABILITIES ...................................... 21,467,711 17,298,987 17,320,058
------------ ------------ ------------
Minority Interest ................................................ 439,703 424,542 415,474
STOCKHOLDERS' EQUITY
Preferred Stock, par value $.01 per share,
8,000,000 authorized, 4,000,000 Series B
Non-Voting Convertible Shares issued
outstanding at September 30, 1997, March 31, 1997
and December 31 1996, respectively .......................... 40,000 40,000 40,000
Common Stock, par value $.60 per share,
40,000,000 authorized, issued and
outstanding, 1,065,765 at September 30, 1997
and 1,015,765 at March 31, 1997
and December 31, 1996 (Note 1) .............................. 639,460 609,460 609,460
Additional Paid-In Capital ..................................... 18,397,320 18,295,820 18,295,820
Retained (Deficit) ............................................. (14,062,452) (10,723,068) (8,978,629)
Subscription Receivable ........................................ (6,000,000) (6,000,000) (6,000,000)
Notes Receivable arising from
Common Stock Purchase
Warrants Sold .................................................. (5,701) (5,701) (5,701)
------------ ------------ ------------
TOTAL STOCKHOLDERS' EQUITY .............................. (991,373) 2,216,511 3,960,950
============ ============ ============
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ....................... $ 26,860,951 $ 26,454,745 $ 26,642,442
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED
SEPTEMBER 30,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
REVENUES
Paging & Two Way Radio .............................. $ 1,152,573 $ 631,390
Commissions ......................................... 442,259 1,706,764
Electronics ......................................... 9,614 1,791,762
Interest Income ..................................... 3,499 $ 16,600
----------- -----------
TOTAL SALES ................... 1,607,945 4,146,516
=========== ===========
COST OF SALES
Paging & Two Way Radio .............................. 735,673 540,853
Commissions ......................................... 275,562 1,350,487
Electronics ......................................... 389,275 1,529,412
----------- -----------
TOTAL COST OF SALES ................... 1,400,510 3,420,752
=========== ===========
GROSS PROFIT ................... 207,435 725,764
=========== ===========
EXPENSES
Selling ............................................. 954,952 1,005,337
General and Administrative .......................... 2,346,338 2,659,235
Interest Expense .................................... 230,368 107,302
----------- -----------
TOTAL EXPENSES ................... 3,531,658 3,771,874
=========== ===========
INCOME BEFORE MINORITY INTEREST,
AND INCOME TAXES ...................................... (3,324,223) (3,046,110)
=========== ===========
Minority Interest in Loss of Consolidated Subsidiaries (15,161) 15,254
----------- -----------
LOSS BEFORE INCOME TAXES .............................. (3,339,384) (3,030,856)
Income Taxes ........................................ -- --
----------- -----------
NET LOSS .............................................. ($3,339,384) ($3,030,856)
=========== ===========
LOSS PER COMMON SHARE ................................. ($ 3.01) ($ 6.36)
----------- -----------
AVERAGE COMMON SHARES OUTSTANDING (NOTE 1) ............ 1,109,587 476,880
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
REVENUES
Paging & Two Way Radio .............................. $ 607,041 $ 631,390
Commissions ......................................... 346,686 670,595
Electronics ......................................... -- 561,494
Interest Income ..................................... 3,069 2,500
----------- -----------
TOTAL SALES ................... 956,796 1,865,979
=========== ===========
COST OF SALES
Paging & Two Way Radio .............................. 388,506 540,853
Commissions ......................................... 189,899 541,525
Electronics ......................................... 379,854 557,494
----------- -----------
TOTAL COST OF SALES ................... 958,259 1,639,872
=========== ===========
GROSS PROFIT ................... (1,463) 226,107
=========== ===========
EXPENSES
Selling ............................................. 412,748 624,771
General and Administrative .......................... 1,408,143 1,974,124
Interest Expense .................................... 136,105 63,975
----------- -----------
TOTAL EXPENSES ................... 1,956,996 2,662,870
=========== ===========
INCOME BEFORE MINORITY INTEREST,
AND INCOME TAXES ..................................... (1,958,459) (2,436,763)
----------- -----------
Minority Interest in Loss of Consolidated Subsidiaries (11,359) 15,254
----------- -----------
LOSS BEFORE INCOME TAXES .............................. (1,969,818) (2,421,509)
=========== ===========
Income Taxes ........................................ -- --
----------- -----------
NET LOSS .............................................. ($1,969,818) ($2,421,509)
=========== ===========
LOSS PER COMMON SHARE ................................. ($ 1.75) ($ 5.08)
=========== ===========
AVERAGE COMMON SHARES OUTSTANDING (NOTE 1) ............ 1,124,823 476,880
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
SEPTEMBER 30,
--------------------------
1997 1996
----------- -----------
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CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss ............................................. ($3,339,384) ($3,030,856)
Adjustments to Reconcile Net Loss to
Net Cash Used By Operations:
Issue of Common Stock for Marketing Agreement ....... -- $ 1,625,000
Issue of Common Stock for interest expense .......... 33,334
Depreciation and Amortization ........................ 618,941 65,183
Amortization of Service Contract ..................... 354,452 --
Minority Interest in Loss ............................ (15,161) --
Changes in:
Accounts Receivable .................................. (260,214) (288,044)
Inventories .......................................... (293,949) 362,058
Prepayments .......................................... (103,044) 30,942
Accounts Payable ..................................... 1,131,756 26,273
Accrued Expenses and Taxes Payable ................... (827,553) (85,272)
Accrued Interest ..................................... 885,671 --
Customer Deposits .................................... (1,075) 24,008
Changes in assets and liabilities net of effects from
purchase of Threshold Communications, Inc. .............
Accounts Receivable ................................... -- 256,347
Inventory ............................................. -- (71,230)
Prepaid Expenses ...................................... -- (11,663)
Accounts Payable ...................................... -- 292,642
Accrued Expenses and Taxes Payable ..................... -- 904
----------- -----------
TOTAL ADJUSTMENTS .................................. 1,523,158 2,227,148
=========== ===========
NET CASH USED IN
OPERATING ACTIVITIES ................................... (1,816,226) (803,708)
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
SEPTEMBER 30,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Paging Carrier Agreements and Other Assets ........... (1,000,345) (86,223)
Deferred PCS License and Buildout Costs .............. (6,544) (1,716,092)
Additions to Property and Equipment .................. (46,139) (47,356)
Payment for purchase of Threshold Communications, Inc.
net of cash acquired ............................... -- (180,556)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES .................. (1,053,028) (2,030,227)
=========== ===========
CASH FLOWS FROM FINANCING
ACTIVITIES
Loan Receivable ....................................... -- 564,000
Stockholder Loan Receivable .......................... -- (81,723)
Purchase Warrants .................................... -- 33,300
Deferred Private Placement Costs ..................... 347,971 (150,521)
Deferred Debenture Costs ............................. (325,000) --
Deferred Registration Costs ........................... 8,758 (41,856)
Net Proceeds (Payments) of Shareholder Loans ......... 70,145 (214,853)
Proceeds of Other Loans .............................. 309,742 445,336
Private Placement Advance ............................ (1,628,254) --
Payments of Bank Loans ............................... (4,776) (5,000)
Proceeds from Debentures.............................. 4,513,093
Payments of Other Loans .............................. (394,723) 23,000
Principal Payments of Capital Lease Obligations ...... (80,097) (80,413)
Sale of Common Stock ................................. 131,500 2,311,005
----------- -----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES ................................... 2,948,359 2,802,275
=========== ===========
NET INCREASE (DECREASE) IN CASH ........................ 79,105 (31,660)
=========== ===========
CASH, BEGINNING OF PERIOD............................... 48,620 54,329
----------- -----------
CASH, END OF PERIOD..................................... $ 127,725 $ 22,669
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
SEPTEMBER 30,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE FOR CASH FLOWS
CASH PAID DURING THE PERIOD FOR:
Interest ............................................. $ 177,941 $ 131,064
Taxes ................................................ -- --
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Property Acquired Under Capital Lease ................ -- ($ 424,276)
Common Stock Issued for Payment of Loan Payable ...... $ 375,000 --
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
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 December 31, 1996 .. 4,000,000 $ 40,000 1,015,765 $ 609,460 $ 18,295,820 ($ 8,978,629)
Net loss ......................... -- -- -- -- -- (1,744,439)
------------ ------------ ------------ ------------ ------------ ------------
Balance as of March 31, 1997 ..... 4,000,000 $ 40,000 1,015,765 $ 609,460 $ 18,295,820 ($10,723,068)
============ ============ ============ ============ ============ ============
Sale of Common Stock in connection
with Private Placement net of
$457,239 of expenses ........... -- -- 205,861 $ 123,516 $ 1,889,577 --
Issuance of common stock for
consulting services............ -- -- 50,000 30,000 101,500
Exchange of Common Stock and
warrants into
8% Cumulative Convertible
Debentures..................... -- -- (205,861) (123,516) (1,889,577)
Net loss ......................... -- -- -- -- -- ($ 3,339,384)
------------ ------------ ------------ ------------ ------------ ------------
Balance as of September 30, 1997 . 4,000,000 $ 40,000 1,065,765 $ 639,460 $ 18,397,320 ($14,062,452)
============ ============ ============ ============ ============ ============
<CAPTION>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Notes Receivable
Arising From
Common Stock Subscription
Purchase Warrant Receivable Total
----------- ----------- -----------
<S> <C> <C> <C>
Balance as of December 31, 1996 .. ($ 5,701) ($6,000,000) $ 3,960,950
Net loss ......................... -- -- ($1,744,439)
----------- ----------- -----------
Balance as of March 31, 1997 ..... ($ 5,701) ($6,000,000) $ 2,216,511
=========== =========== ===========
Sale of Common Stock in connection
with Private Placement net of
$457,239 of expenses ........... -- -- --
Issuance of Common Stock in
connection with consulting
agreement....................... -- -- 131,500
Net loss ......................... -- -- (3,339,384)
----------- ----------- -----------
Balance as of September 30, 1997 . ($ 5,701) ($6,000,000) $ (991,373)
=========== =========== ===========
</TABLE>
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Business Activity and Basis of Presentation
During 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 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 1995, the Company formed Electrocomm Wireless, Inc., a Delaware
corporation as a subsidiary, to become a radio paging and two-way radio
carrier in the New York Metropolitan Area and the State of New Jersey.
In July 1995, the Company formed Personal Communications Network,
Inc.("PCN"), a Delaware corporation, to participate in the Federal
Communications Commission auction for licenses to engage in personal
communications services ("PCS"). On May 8, 1996 the Company obtained
six PCS licenses for $26,452,200 entitling it to operate wireless PCS
telephone systems covering nearly 1.5 million people in three states.
In February, 1997 four (4) officers and directors of the Company
acquired a 24% interest in "PCN". On October 10, 1997, in anticipation
of agreeing to hire a new management team and secure anticipated
further financing, said four (4) officers and directors of the Company
rescinded the original transaction. As a result, PCN is now 100% owned
by the Company.
On March 22, 1996, Threshold Communications, Inc. ("TCI") acquired
substantially all of the assets and assumed certain liabilities of
General Communications and Electronics, Inc. ("GCE"). TCI also acquired
as part of this transaction 56 2/3% of the outstanding stock of General
Towers of America, Inc. (which engages in the business of providing two
way radio services in the New York Metropolitan Area). TCI and its
subsidiary General Towers of America, Inc. ("GTA") are treated as
subsidiaries of the Company.
On June 28, 1996, the Company acquired 51% of Threshold Communications,
Inc. (which engages in the business of providing radio paging services
in the New York Metropolitan Area.) On November 17, 1997, the Company
has entered into a an agreement to acquire the remaining 49% of TCI for
shares of the Company's common stock with a market value of $90,000 or,
in the alternative, for a $90,000 cash payment.
On July 31, 1997 the Company's board of directors effected a 1 for 12
reverse stock split of its $.05 par value common stock. The new common
stock has a $.60 per share par value. New management has announced that
it will seek stockholder ratification of the reverse stock split at a
special meeting of stockholders expected to be held prior to the end of
the current fiscal year. All references to number of common shares for
all periods presented assumes such ratification and have been
retroactively restated for the reverse stock split.
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
On August 11, 1997 the Company changed its fiscal year end from
December 31 to March 31.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form
10-QSB and Article 10 of Regulation S-X. Accordingly, they do not
necessarily include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the six months ended
September 30, 1997 are not necessarily indicative of the results that
may be expected for the year ended March 31, 1998. 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 10K-SB for the year ended December
31, 1996.
(B) Principles of Consolidation
The consolidated financial statements include the accounts of
Electronics Communications Corp., 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 majority owned subsidiaries, Personal
Communications Network, Inc., Threshold Communications, Inc. and
General Towers of America, Inc. All significant intercompany accounts
and transactions have been eliminated in consolidation.
(C) Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided
using accelerated methods over the estimated useful lives of the
respective assets (5 to 7 years).
(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 (i) sales
of electronic goods, (ii) commissions for fees earned on sales of
cellular radio service contracts, and (iii) sales of its radio paging
and two way radio services. Sales of 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
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
(E) Revenue Recognition (continued)
products are recognized when they are shipped. Revenues from sales of
electronic goods represented less than 1% and 43% of the Company's
total revenue for the quarter and six months ended September 30, 1997
and 1996 respectively. 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 28% and 41% of the Company's total
revenue for the quarter ended September 30, 1997 and 1996 respectively.
The Company establishes a reserve of 3.5% for charge-backs on customers
that prematurely terminate cellular service. In addition to the
commissions paid by the cellular radio supplier, the Company receives
co-op fees. Co-op fees are reimbursements of expenditures that are
approved by the cellular radio supplier for advertising and promotion
in connection with the sale of cellular radio contracts. Revenues from
radio paging and two way radio services are recognized in the beginning
of the month for which they are invoiced and amounted to 72%and 15% of
revenues in the quarter ended, September 30, 1997 and 1996
respectively.
(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 and PCS 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.
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
(H) Fair Value of Financial Instruments
At September 30, 1997, March 31, 1997 and December 31, 1996, the fair
values of cash, cash equivalents, non-convertible short term debt and
current portion of long-term debt, accounts payable, accrued interest,
accrued salaries and other accrued liabilities approximated their
carrying values because of the short-term nature of these instruments.
The fair value and carrying amount of the Company's long term notes
payable to the FCC was adjusted to reflect an imputed interest rate of
14% even though the actual rate is 7% which more accurately reflect the
Company's actual borrowing rate.
NOTE 2 - PRIVATE PLACEMENT OF SECURITIES AND 8% CUMULATIVE CONVERTIBLE
DEBENTURES
On May 29, 1997, the Company sold 205,861 units consisting of an
aggregate 205,861 shares of Common Stock and Class A warrants
exercisable to purchase an additional aggregate 308,792 shares of
Common Stock at an exercise price of $60.00 per share (subsequently
reduced to $2.25 per share). The units were sold in a Private Placement
to a number of unaffiliated investors for an aggregate $2,470,334
including cash consideration of $2,061,999 and an exchange of Company
notes payable and accrued interest aggregating $408,334. The Company
incurred $457,239 of expenses in connection with the Private Placement.
All of the investors in this Private Placement subsequently exchanged
their units for Debentures in the August 1997 Private Placement
Offering hereinafter described.
On August 7, 1997, the Company consummated a Regulation S Private
Placement Offering directed to non "United States Persons" pursuant to
which the Company sold $2,500,000 principal amount of the Company's
Cumulative Convertible Debentures (the "Debentures"). The principal
amount of the Debentures are convertible into shares of the Company's
common stock at the option of the holder, commencing 41 days after
issuance, at a price equivalent to a 30% discount from market based
upon the five (5) day average daily closing bid price, as reported on
NASDAQ, for the five (5) trading days immediately preceding the
applicable date of conversion. The Debentures bear interest at the rate
of 8% per annum payable on August 7 of each year commencing August 7,
1998. The Debentures are redeemable and callable for conversion under
certain circumstances and are due June 30, 2000. The Company paid a
placement fee equal to 10% of the gross proceeds and a 3%
non-accountable expense allowance to the Placement Agent. As of
September 30, 1997, no Debentures had been converted into shares of the
Company's common stock (See Note 12).
At the same time but separate from the Regulation S Private Placement
Offering, $2,470,334 principal amount of the Debentures were offered to
those persons who subscribed to and participated in the Company's May
1997 Private Placement of the units. Those investors were offered the
opportunity to exchange all, but not less than all, of their units for
Debentures, on a dollar for dollar basis. As a result, effective August
7, 1997, the holders of the May 1997 Private Placement units exchanged
their units for an agggregate $2,470,334 principal amount of the 8%
Convertible Debentures. The Debentures in this separate offering are
convertible at the option of the holder commencing 180 days after
issuance.
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - PCS LICENSES
(A) The PCS licenses were awarded in a Federal Communications
Commissions ("FCC") "C" Block Auction. The markets awarded the Company
include Elmira-Corning, New York; Bangor/Lewiston-Auburn/Waterville-
Augusta, Maine; and Burlington/Rutland-Bennington, Vermont. The Vermont
markets encompass virtually the entire state. The Maine markets cover a
majority of the population and most of the state geographically. The
licenses expire and are subject to renewal after ten (10) years.
The Company's total winning bids amounted to $26,452,200, after the 25%
discount provided to small businesses, for which the Company qualified
under the terms of the auction. The Company deposited cash of
$2,645,220. The remaining balance is payable over the next 10 years
with 7% interest only during the first six years. On March 31, 1997,
the FCC imposed a moratorium on the payment of interest until March 31,
1998. Included in the license costs are certain legal fees incurred in
obtaining the license. Capitalized PCS interest in the amount of
$1,750,897 is included in PCS Licenses at September 30, 1997 and
represents interest capitalized in conjunction with these licenses. The
Company has not begun PCS service and will require substantial
additional financing to pay the balance of the purchase price for the
PCS licenses and to construct the system prior to initiating PCS
service. No assurance can be given that such financing will become
available. Assuming inception of PCS services, the Company will
amortize the licenses and related costs over a 40 year period.
On October 16, 1997 in an effort to bring relief to C-Block license
holders, the FCC offered three options, one of which must be chosen by
January 15, 1998. The three options are as follows: (1) an "Amnesty
Option" permitting return of the licenses which will result in the
forfeiture of the original down payment of $2,645,220 and the return to
the Company of the previous installments paid which amount to
approximately $286,000; (2) a "Disaggregation Option" permitting the
return of 15 megahertz of the 30 megahertz of spectrum awarded under
the licenses, back to the FCC and reducing the current note payable to
the FCC by 50%; and (3) a "Prepayment Option" permitting the exchange
of all licenses in a particular BTA for a partial reduction of the
current note payable to the FCC (equal to 70% of the total down
payments of the surrendered licenses).
(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. Interest
cost associated with obtaining these licenses is being capitalized. The
licenses when put into service will be amortized over a forty year
period.
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - CONSULTING SERVICE CONTRACT
In July 1997, the Company entered into a Consulting Agreement with an
unaffiliated financial advisory firm. Pursuant to the terms of this
agrement, the firm was hired as a financial advisory consultant to
provide promotional and specialties and managment consulting services
to the company. In consideration of the services to be performed by the
firm, the Company isued 50,000 shares pursuant to a Registration
Statement filed with the SEC on Form S-8. As of September 30, 1997, the
Company had accrued $109,202 in prepaid expenses with respect to this
contract.
NOTE 5 - NOTES PAYABLE
(A) 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 former President, cross corporate
guaranteed by the Company's Free Trade Distributors, Inc. subsidiary
and secured by the Company's inventory. On November 4, 1997, the
Company agreed to pay the balance in full by January 31, 1998. Interest
is payable monthly at the rate of 1.5% per annum in excess of the
bank's fluctuating prime lending rate.
(B) On February 29, 1996, the Company borrowed $134,000 pursuant to a
financing arrangement with an unaffiliated corporation. Interest is
payable at a rate of 10% in monthly installments of $1,117 per month.
As additional consideration, the Company issued the corporation 66,667
Class "A" Warrants exercisable to purchase 66,667 shares of common
stock at an exercise price of $27.00 per share (subsequently reduced to
$2.25 per share). The Company also granted 90 day registration rights
and "Piggy Back" registration rights. The balance of this loan was
$109,711 at December 31, 1996. The note was paid in March 1997. As a
result of this transaction, $500,000 in loan origination fees were
recognized and amortized over the life of the loan.
(C) In connection with TCI's acquisition of GCE, the Company assumed a
$350,000 non-interest bearing note payable to a corporation owned by a
shareholder of the Company. The outstanding principal amount of this
non interest bearing note was $251,777, $281,944 and $311,111 at
September 30, 1997, March 31, 1997 and December 31, 1996, respectively,
less unamortized discount (discount is based on interest of 12%) for a
net balance of $205,788, $235,955 and $265,121 respectively.
(D) The Notes Payable - FCC consist of six 7% 10 year notes aggregating
$23,806,980. The notes are payable in quarterly installments of
interest only for the first six years and principal plus interest
thereafter. The notes are secured by the PCS licenses. The interest
payment due December 31, 1996 was partially paid on March 31, 1997. The
Company has not made a quarterly interest payment since March 31, 1997.
This non-payment is due to an FCC moratorium on quarterly interest
payments while it awaits a decision on the FCC changing the quarterly
installment due. This anticipated change is being considered to allow
PCS license holders to better utilize short term cash to more quickly
build out their systems in an effort to generate revenues.
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - NOTES PAYABLE (continued)
(E) On September 20, 1996, the Company borrowed $500,000 for working
capital purposes from an unaffiliated private lender. In consideration
for the loan, the Company issued 16,667 shares of common stock and
"Class A" warrants exercisable to purchase 33,334 shares of common
stock at $27 per share (subsequently reduced to $2.25 per share) to the
lender. The loan bore interest at the rate of 10% per annum and was due
and payable on June 20, 1997. The Company obtained an extension of the
due date and in July, 1997, paid $125,000 of this indebtedness. The
$375,000 balance together with accrued interest of $33,334 was
exchanged by the lender for units in the Company's above described May,
1997 Private Placement. These units were subsequently exchanged by the
lender for $408,334 in principal amount of the Company's 8% Cumulative
Convertible Debentures in connection with the Company's August, 1997
Private Placement.
(F) Purchase Money Notes Payable in monthly installments of $1,262
including interest at 13%. The last payment is due on August 1, 2001.
This loan is collateralized by equipment with a book value of $44,842.
The balance of this loan was $46,277, $50,852 and $52,764 at September
30, 1997, March 31, 1997 and December 31, 1996 respectively.
(G) On October 21, 1996 the Company borrowed $200,000 for working
capital purposes from an unaffiliated private lender. In consideration
for the loan, the Company isued 6,667 shares of common stock and "Class
A" warrants exercisable to purchase 13,334 shares of common stock at
$27 per share (subsequently reduced to $2.25 per share) to the lender.
The loan bore interest at the rate of 10% per annum and was due and
payable in November, 1997. The loan was secured by a lien on the
Company's receivables and equipment and was repaid in full in June,
1997.
NOTE 6 - 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 October 10, 1997
these loans were converted into Common Stock at $1.30 per share.
NOTE 7 - LOSS PER COMMON SHARE
The Company computes loss per common share by dividing the net loss by
the weighted average number of common stock and dilutive equivalent
shares outstanding. The computation of fully diluted net loss per share
was antidilutive in each of the periods presented; therefore, the
amounts reported for primary and fully diluted loss are the same.
NOTE 8 - CONVERTIBLE PREFERRED STOCK
On July 23, 1996, the Board of Directors of the Company authorized the
issuance of an aggregate of 4,000,000 shares of Series B Preferred
Stock ("Preferred Stock"). Each share of Preferred Stock was
convertible into .13 shares of the Company's common stock. These shares
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - CONVERTIBLE PREFERRED STOCK (continued)
were purchased by certain officers and directors of the company for
three year Promissory Notes ("Notes") bearing interest at the rate of
7% per annum. The interest was to be accrued and was not to be payable
until the securities were sold. The Notes were non-recourse, but
collateralized by the pledge of the Preferred Stock. Each share of
Preferred Stock was subject to a three year vesting period, whereby 1/3
was immediately vested, and the balance was to be vested during the
next two years as long as the aforementioned individuals remained as
either officers or directos of the Company.
On October 10, 1997, in an effort to hire a new management team and
secure anticipated further financing, said officers and directors
agreed to rescind this transaction. As a result, the 4,000,000 shares
of Series B Preferred have been rescinded by the Company and are no
longer deemed outstanding.
NOTE 9 - 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. At December 31, 1996, the Company had federal net operating
loss carryforwards of approximately $5,000,000 which will expire
beginning in fiscal 2010. These losses are limited by the provisions of
Section 382 of the Internal Revenue Code due to a considered more than
50% change in ownership with the issuance of the Convertible
Subordinated Debenture in August 1997. Following such a change, the
utilization of tax loss carryforwards is limited to the value of the
Company on the date of such change, multiplied by the Federal long-term
exempt rate (the "annual limitation"). To the extent amounts available
under the annual limitation are not used, they may be carried forward
for the remainder of 15 years from the date the losses were originally
incurred. As a result of the change in ownership, use of net operating
losses will be limited to approximately $300,000 per year subject to
certain additional limitations.
NOTE 10- PENDING LITIGATION
On March 4, 1996 the Company commenced an action entitled Electronics
Communications Corp. against Toshiba America Consumer Products, Inc.
("Toshiba") and Audiovox Corporation ("Audiovox"), case number 96 Civ.
1365, in the United States District Court of the Southern District of
New York. The Complaint asserted claims for antitrust, breach of
contract, tortious interference with contract and tortious interference
with prospective economic advantage and business relations. The
Complaint sought damages in excess of $3,000,000. This action was
commenced because the Company expended significant monies and resources
including the issuance of 16,667 shares of the Company's common stock
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10- PENDING LITIGATION (continued)
to a consultant in anticipation of a South American cellular telephone
program which the Company was to undertake exclusively on behalf of
Toshiba, based on certain reliance on Toshiba, and the withdrawal of
Toshiba's commitment based on what the Company believed was an unlawful
conspiracy with Audiovox. Immediately prior to the commencement of the
program, Toshiba discontinued manufacturing the line of cellular
telephones that the program was designed to offer. This decision, which
the Company believed was coerced by Audiovox and caused significant
damages to the Company.
The defendants Toshiba and Audiovox moved to dismiss a portion of the
case, claiming that the Company had not pled a cognizable antitrust
cause of action, and that the remaining claims should be dismissed for
the lack of supplemental jurisdiction, which could then be prosecuted
in state courts. On August 12, 1996 the Court ruled in favor of the
motion of defendants, Toshiba and Audiovox, and the case was dismissed
on such date. The Company appealed the Court's ruling, filing its Brief
on Appeal on February 21, 1997. On March 12, 1997, Toshiba and Audiovox
served their responsive briefs, and oral argument before the United
States Court of Appeals for the Second Circuit was held on May 22,
1997. On October 28, 1997 the Second Circuit affirmed the District
Judge. The Company intends to pursue its state law claims for breach of
contract and equitable estoppel with respect to any sums Toshiba cliams
the Company owes it towit; $379,000.
On or about March 11, 1997, the Company was served with a Summons and
Complaint in an action entitled: "Daily News, L.P. v. Free Trade a/k/a
Free Trade Distributors, Inc. and Electronics Communications Corp.,"
pending in the United States District Court for the Southern District
of New York. The Plaintiff, The Daily News, claimed breach of a certain
Advertising Contract, in that the Company's subsidiary failed to pay
for certain advertising and failed to meet the minimum advertising
expenditures set forth therein, resulting in the Imposition of a "short
rate" with higher payment requirements. As a result, Plaintiff claimed
damages aggregating $156,000.
As a result of settlement discussions, an Agreement in Principle
regarding settlement was reached. Counsel for the parties have prepared
and the parties have executed appropriate settlement documents which
have been "So Ordered" by the court. The agreement provided for the
payment of $75,000 by the Company in sequential payments through April
1998. The Company has paid $25,000 of the aforestated sum and if it
completes payments by April 1, 1998, The Daily News and the Company
will exchange general releases thus releasing and discharging the other
of any and all claims.
On or about July 11, 1997 the Company was served with a Summons and
Complaint in an action entitled: Brightpoint, Inc. v. Free Trade
Distributors, Inc. and Electronics Communications Corp., pending in the
United States District Court for the Southern District of Indiana,
Indianapolis Division. Brightpoint is a former supplier of the Company,
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10- PENDING LITIGATION (continued)
and claims that the Company owes it approximately $400,000 plus
interest for merchandise delivered, consisting principally of cellular
telephones. Prior to this suit, then counsel for the Company advised
the Company it has valid counterclaims which equaled or exceeded
Brightpoint's claims for payment. The Company has not answered yet,
based upon an agreement with counsel for Brightpoint to extend such
obligation to answer without date, pending an exchange of documents.
Brightpoint and the Company through their counsel have also agreed to
mediate the dispute in Indianapolis, have jointly selected a mediator,
and expect shortly to begin this alternative resolution process.
NOTE 11- BUSINESS PLAN AND LIQUIDITY
The Company's financial statements for the six months ended September
30, 1997 have been prepared on a going concern basis, which
contemplates the realization of assets and settlement of liabilities
and commitments in the normal course of business. The Company has
incurred net losses of $3,339,384 and $3,030,856 for the six months
ended September 30, 1997, and 1996 respectively. The Company has a
working capital deficiency of $2,235,467 at September 30, 1997. In
addition, the Company has an interest payment in excess of $2,000,000
due to the FCC (see Note "5D") upon lifting of the moratorium. The
Company's financial statements for the three months ended September 30,
1997 have been prepared on a going concern basis, which contemplates
the realization of assets and settlement of liabilities and commitments
in the normal course of business. The Company has incurred net losses
of $1,969,818 for the quarer ended September 30, 1997, $1,048,802 for
the quarter ended March 31, 1997 and $5,604,054 for the year ended
December 31, 1996.
As a result of the continuing deteriorating business climate in the
paging industry and other busines reasons, the Company determined to
sell the assets and liabilities of its paging and two way radio
operations. These operations represent substantially all of the
Company's revenues and new management intends to seek shareholder
approval for this sale. The Company is also negotiating the possible
sale of equity securities in an effort to concentrate on the
development, either on its own or through a joint venture, of a PCS
system which will utilize its six PCS licenses.
On October 1, 1997, the Company informed 30 of its 49 employees that
they were being indefinitely laid off. All payroll to such employees
has been paid in full. These layoffs will result in the saving of
approximately $120,000 per month. In October 1997, the Company entered
into a Termination of Lease with its landlord. The Company agreed to
pay to the landlord the sum of $11,000 and release the security deposit
of $18,500 to the landlord. The lease between the parties is
surrendered and cancelled as of midnight on November 30, 1997, unless
extended for the month of December. The rent for November and December,
if the lease is extended, was reduced to $6,000.
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 - SUBSEQUENT EVENTS
On October 10, 1997 all officers and several directors of the Company
resigned for the purpose of hiring a new management team and securing
anticipated further financings.
In addition, four officers and directors of the Company agreed to
rescind a transaction whereby said officers and directors acquired a
24% interest in Personal Communications Network ("PCN"), the Company's
subsidiary that obtained six PCS licenses on May 8, 1996 in the Federal
Communications Commission C-Block auctions. Previously, a consulting
firm, which had been issued a 10% interest in PCN, failed to provide
the agreed upon services and its shares were cancelled. As a result,
PCN is now 100% owned by the Company.
On October 10, 1997, the 4,000,000 shares of Series B Convertible
Preferred Stock originally issued for a three year promissory note
bearing interest at 7% per annum to previous officers and directors of
the Company were cancelled and are no longer deemed outstanding.
On October 30, 1997 the board of directors approved an employment
agreement for Joseph Rosio as CEO and president of the Company for a
forty month term.
On October 31, 1997 investors converted $2,300,000 of Convertible
Debentures into 2,248,114 shares of common stock.
In October, 1997, the Company borrowed $100,000 and in November, 1997,
borrowed an additional $200,000 for working capital purposes from an
unaffiliated private lender. Each loan is repayable within one year
with interest at the rate of 10% per annum. It is anticipated that some
portion or all of this indebtedness will be changed into convertible
debt on terms to be negotiated.
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
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.
Overview
The Company currently operates a state of the art digital 900-megahertz Glenyre
satellite-based Flex paging system which covers South-Western Connecticut,
Southern New York, New Jersey and the downtown Philadelphia area. The Company
also operates a trunked two-way radio system covering New York and New Jersey.
The Company through its PCN subsidiary successfully bid, through the FCC's
C-Block auction, for six 30MHz baseband PCS licenses covering portions of New
York, Vermont, Maine, and New Hampshire. On October 10, 1997 all officers and
several directors of the Company resigned for the purpose of hiring a new
management team and securing anticipated further financing. As a result of the
continuing deteriorating business climate in the paging industry and for other
business reasons, the Board of Directors has decided, subject to shareholder
approval, to sell the assets and liabilities of its paging and two-way radio
operations. The Company is also negotiating the possible sale of equity
securities in an effort to concentrate on the development, either on its own or
through a joint venture, of a PCS system in the Northeast which will utilize its
six broadband PCS Licenses.
Results of Operations
For the Three Months and Six Months Ended September 30, 1997 and The Three
Months and Six Months Ended September 30, 1996
Revenues from paging and two-way radio for the three months ended September 30,
1997 were $607,041 compared to $631,390 for the three months ended September 30,
1996. Gross margins were 36% for the three months ended September 30, 1997
compared with 14% for the three months ended September 30, 1996. Revenues from
paging and two-way radio for the six months ended September 30, 1997 were
$1,152,573 compared to $631,390 for the six months ended September 30, 1996.
Gross margins were 36% for the six months ended September 30, 1997 compared with
14% for the six months ended September 30, 1996. Sales were down 3% in the three
months ended September 30, 1997 as a result of the change in Electronic
Communication's customer base. For the three months ended September 30, 1996,
all of the Company's customers were the result of indirect sales of airtime. In
other words, the Company resold airtime on other networks. In May of 1997 the
Company completed the build out of its state of the art 900-megahertz Glenayre
paging system. As a result, the Company's sales force began to focus on direct
sales or putting subscribers on their own network. As a result of the Company's
focus on direct sales, paging and two-way radio revenues increased by 83% in the
six months ended September 30, 1997. As a result of a change in the Company's
subscriber base, sales were down 3% for the three months ended September 30,
1997. Paging and two-way revenues were unchanged for the three months and six
months ended September 30, 1996 as the Company acquired a 51% stake in Threshold
Communications, thereby entering the paging and two-way radio business, on June
28, 1996.
<PAGE>
Commissions on activations of cellular phones decreased from $670,595 for the
three months ended September 30, 1997 to $346,686 for the three months ended
September 30, 1996. Commissions on activations of cellular phones decreased from
$1,706,764 for the six months ended September 30, 1997 to $442,259 for the six
months ended September 30, 1996. This decrease in commissions was primarily as a
result of a "Settlement & Separation Agreement" whereby the Company severed its
agency relationships with NYNEX Mobile Communications, Inc. ("NYNEX") and Bell
Atlantic Mobile Communications, Inc. ("Bell Atlantic") with respect to the
solicitation of cellular activations. This was the Company's largest source of
Commission and other income. After the "Settlement and Separation Agreement with
NYNEX and Bell Atlantic, the Company entered into various agreements with
respect to soliciting activation's for PCS, and cellular activation's on behalf
of OmniPoint and AT&T (directly or through various agents) in the New York
Metropolitan Area. Sales for the three months ended September 30, 1997decreased
by 48% compared to the three months ended September 30, 1996. Gross margins
increased to 45% from 19%. Sales for the six months ended September 30, 1997
decreased by 74% compared to the six months ended September 30, 1996. Gross
margins increased to 38% from 21%. This decrease in sales for the three months
and six months ended September 30, 1997 compared to the periods ended September
30, 1996 are the result of the "Settlement & Separation Agreement" with NYNEX
and Bell Atlantic which was partially offset by various agreements with
Omnipoint and AT&T. These various other agreements, while allowing the Company
to earn higher margins, result in significantly lower sales volume.
Revenues from the sale of electronics were only $9,614 for the six months ended
September 30, 1997 reflecting the Company's exit from the business. However, the
Company, having been advised of the affirmance of the October 28, 1997 dismissal
of the Toshiba vs ECC federal lawsuit and in conjunction with its new auditors
and council, has reinstated the account payable and charged cost of sales in the
amount of $379,854. The Company will be evaluationg the state law claims against
Toshiba and will pursue those claims if appropriate by way of settlement or
monetary recovery in state court.
Interest income was $3,069 for the three months ended September 30, 1997
compared to $2,500 for the three months ended September 30, 1996. Interest
income was $3,499 for the six months ended September 30, 1997 compared to
$16,600 for the six months ended September 30, 1996.
Selling, General and Administrative expenses decreased approximately 30% to
$1,820,891 for the three months ended September 30, 1997 from $2,598,895 for the
three months ended September 30, 1996. Selling, General and Administrative
expenses decreased approximately 10% to $3,301,290 for the six months ended
September 30, 1997 from $3,664,572 for the six months ended September 30, 1996.
The decrease was primarily the result of a decrease in promotional expenses
which were partially offset by higher legal fees and increased rent resulting
from a move to larger facilities.
Interest expense was $136,105 for the three months ended September 30, 1997
compared to $63,975 for the three months ended September 30, 1996, Interest
expense was $177,941 for the six months ended September 30, 1997 compared to
$107,302 for the six months ended September 30, 1996. Interest expense increased
for the three months and six months ended September 30, 1996 as a result of
leases for office equipment, leases for paging equipment, increased bank
borrowings and the private placement of 8% convertible debentures on August 7,
1997.
<PAGE>
Financial Condition, Liquidity and Capital Resources
The Company has incurred net losses of $1,589,964 and $2,421,509 for the three
months ended September 30, 1997 and 1996 respectively, and $2,959,530 and
$3,030,856 for the six months ended September 30, 19966 and 1997 respectively.
The Company has a working capital deficiency of $1,855,613 at September 30, 1997
and $5,495,175 at March 31, 1997. The improvement of working capital at
September 30, 1997 compared to March 31, 1997 is primarily the result of a
reclassification of long term assets of the paging and two-way radio systems to
current assets held for sale.
Net cash used in operating activities increased to $1,816,226 for the six months
ended September 30, 1997 compared to $803,708 for the six months ended September
30, 1996. The increase in net cash used in opearting activities resulted
primarily from interest payments to the FCC for the Company's PCS licenses,
increased rent and other moving related costs as well as higher legal fees. Net
cash used in investing activities was $1,053,028 for the six months ended
September 30, 1997 compared to $2,030,227 for the six months ended September 30,
1996. Net cash provided by financing activities increased to $2,948,359 for the
six months ended September 30, 1997 compared to $2,802,275 for the six months
ended September 30, 1996. On August 7, 1997, the Company consummated a Private
Placement Offering pursuant to which the Company offered $2,500,000 principal
amount of the Company's 8% Subordinated Convertible Debenture. At the same time
but separate from the Private Placement Offering $2,470,334 principal amount
Debentures were offered to those persons who subscribed to and participated in
the Company's May 1997 Private Placement of units. On August 7, 1997, the
investors elected to convert their securities into $470,334 of the 8%
Convertible Debentures.
In addition, the Company has an interest payment in excess of $2,000,000 due to
the FCC upon lifting of the moratorium on interest payments due from the C-Block
PCS license holders. However, the Company could, at its option, on or before
January 15, 1998 reduce or eliminate this payment by surrendering some or all of
these licenses. If the Company surrenders all its C-Block PCS licenses, it will
be entitled to a refund of previous interest payments in the amount of
approximately $280,000. However, the Company would also forfeit its original
down payment of approximately $2.6 million.
On October 1, 1997, the Company informed 30 of its 49 employees that they were
being indefinitely laid off. These layoffs will result in the savings of
$120,000 per month. In October 1997, the Company terminated its lease at 10 Plog
Road in Fairfield, New Jersey effective November 30, 1997 with an option to
extend the lease, at the Company's option, to December 31, 1997. The Company is
also evaluating other cost saving measures.
Subsequent to September 30, 1997, the Company borrowed a total of $300,000 from
a private lender. Management is currently considering the sale of its paging and
two-way radio operations and the s ale of equity securities to enable the
Company to meet its current and future obligations and acquire a business that
will generate cash flows sufficient to fund the interest on the PCS licenses.
<PAGE>
Forward-Looking Statements
This quarterly report on Form 10-Q for the quarter ended September 30, 1997 as
well as other public documents of the Company contain forward-looking statements
which involve risks and uncertainties. The Company's actual results may differ
materially from those discussed in such forward-looking statemnts. Such
statements include, without limitation, the Company's expectation and estimates
as to future financial performance, including growth in net sales and earnings,
cash flows from operations, improved results form business consolidations, the
possibility of gains from dispositions of the Company's PCs network and the
avialabilty of funds form the sale of additional sharees of Electronic
Communications Corp. Readers are urged to consider statements which use the
terms "believes," "no reason to believe," "expects," "plans," "intends,"
"estimates," "anticipated," or "anticipates" to be uncertain and
forward-looking. Such statements reflect the current views of the Company with
respect to future events and are subject to certain risks, uncertainties and
assumptions. In addition to factors that may be described in the Company's
Commission filings, including this filing, the following factors, among others,
could cause the Company's actual results to differ materially from those
expressed in any forward-looking statements made by the Company; (I)
difficulties or delays in building out the Company PCS network; (ii) actions by
competitors, including business combinations, technological breakthroughs, new
product offerings and marketing and promotional successes; (iii) the inability
to secure capital contributions or loans from outside investors or sell assets
or additional shares of Electronic Communications Corp; (iv) effects of and
changes in current FCC rules and regulations; (v) difficulties or delays in
realizing improved results from business consolidations and in realizing gains
form the sale of certain assets held for sale; and (vi) insolvency of any
potential joint venture partners.
Effect of New Accounting Standard
In March 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share," which establishes new standards for computing and
presenting earnings per share. SFAS No. 128 will be effective for interim and
annual financial statements issued after December 15, 1997. The Company believes
that the adoption of SFAS No. 128 will not have a material impact on the
Company's reported earnings per share.
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company incorporates herein the information set forth in Note 10 to
the Financial Statements of this report.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) On July 31, 1997. the Company's Board of Directors effected a one
for twelve reverse stock split of its $.05 par value common stock. The
new common stock has a $.60 per share par value. The Company's new
management has announced that it will seek stockholder ratification of
the reverse stock split at a special meeting of the stockholders
expected to be held prior to the end of the current fiscal year.
(c) See Note 2 to the financial statements contained herein as to a May
29, 1997 Private Placement of 205,861 units by the Company and the
subsequent exchange of such units by the holders of same for $2,470,334
in principal amount of 8% Cumulative Convertible Debentures in a
Private Placement effected on August 7, 1997. Each of the investors
represented that he was an "accredited investor" as defined in
Regulation D promulgated under the Securities Act of 1933 and was
acquiring the securities for his own account for investment and not
with a view to distribution.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMAION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
DATED: November 19, 1997
ELECTRONICS COMMUNICATIONS CORP.
By: /s/ Joseph A. Rosio
----------------------------
Joseph A. Rosio, President
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