<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------------
FORM 10-QSB/A-1
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the Quarter Ended
June 30, 1996 Commission File No. 1-13764
ELECTRONICS COMMUNICATIONS CORP.
(Exact name of Registrant as specified in its Charter)
Delaware 11-2649088
(State of Incorporation) (IRS Employer Identification No.)
10 Plog Road, Fairfield, New Jersey 07004
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code: (201) 808-8862
Former name, former address and former fiscal year, if changed since last
report:
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for a shorter period that the registrant was
required to filed such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
As of August 8, 1996, there were 4,876,762 shares of Common Stock, $.05 par
value outstanding.
<PAGE>
PAGE 1
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31,
------------- -------------
1996 1995
---- ----
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash $925,873 $18,000
Restricted Cash $1,100,000 $1,100,000
Accounts Receivable
(Net of $60,450 and $80,987 Allowance for Doubtful
Accounts at June 30, 1996 and
December 31, 1995, respectively.) 1,654,806 2,204,789
Inventories 543,818 476,796
Bid Deposit 1,322,610 1,000,000
Loan Receivable 106,560 550,000
Loan Receivable - Stockholder 81,034 -
Prepaid Expenses 73,447 78,849
------------- -------------
TOTAL CURRENT ASSETS 5,808,148 5,428,434
------------- -------------
PROPERTY AND EQUIPMENT
Property and Equipment 1,766,348 335,858
Accumulated Depreciation (182,015) (75,544)
------------- -------------
NET PROPERTY AND EQUIPMENT 1,584,333 260,314
------------- -------------
OTHER ASSETS
Paging Carrier Agreement 978,843 -
Deferred Private Placement Costs 507,181 225,787
Debenture Costs 437,844 -
Deferred License Costs 323,910 293,810
Security Deposits and Other Assets 144,040 38,313
Goodwill 68,497 -
------------- -------------
TOTAL OTHER ASSETS 2,460,315 557,910
------------- -------------
TOTAL ASSETS $9,852,796 $6,246,658
------------- -------------
------------- -------------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
PAGE 2
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
------------- -------------
1996 1995
---- ----
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES
Accounts Payable $952,446 $1,783,344
Notes Payable - Other 489,000 28,000
Notes Payable - Bank 1,145,000 1,225,000
Notes Payable - Stockholders 18,077 252,007
Current Portion of Obligations Under Capital Leases 77,170 50,244
Private Placement Advance - 116,223
Accrued Expenses 471,993 248,764
Customer Deposits 38,742 -
------------- -------------
TOTAL CURRENT LIABILITIES 3,192,428 3,703,582
------------- -------------
LONG TERM LIABILITIES
Notes Payable - Debentures 2,315,000 -
Obligations under Capital Leases 375,281 78,801
------------- -------------
TOTAL LONG TERM LIABILITIES 2,690,281 78,801
------------- -------------
Minority Interest 470,736 -
STOCKHOLDERS' EQUITY
Common Stock, par value $.05 per share, 40,000,000
authorized, issued and outstanding 4,169,039
at June 30, 1996 and 3,003,697 at December, 31 1995. 208,453 150,186
Additional Paid-In Capital 6,960,097 5,320,629
Retained (Deficit) (3,643,498) (2,947,539)
Notes Receivable arising from Common Stock Purchase Warrants Sold (25,701) (59,001)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 3,499,351 2,464,275
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $9,852,796 $6,246,658
------------- -------------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
PAGE 3
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
--------------------------- ---------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
SALES
Electronics $1,230,268 $818,820 $2,213,996 $1,725,646
Commissions 1,036,169 708,125 2,315,967 1,404,063
------------- ------------- ------------- -------------
TOTAL SALES 2,266,437 1,526,945 4,529,963 3,129,709
------------- ------------- ------------- -------------
COST OF SALES
Electronics 971,918 613,992 1,799,734 1,356,657
Commissions 808,962 540,777 1,698,397 1,107,708
------------- ------------- ------------- -------------
TOTAL COST OF SALES 1,780,880 1,154,769 3,498,131 2,464,365
------------- ------------- ------------- -------------
GROSS PROFIT 485,557 372,176 1,031,832 665,344
------------- ------------- ------------- -------------
EXPENSES
Selling 380,566 125,354 514,694 231,423
General and Administrative 685,111 207,609 1,072,239 384,394
------------- ------------- ------------- -------------
TOTAL EXPENSES 1,065,677 332,963 1,586,933 615,817
------------- ------------- ------------- -------------
OPERATING INCOME (LOSS) BEFORE OTHER
EXPENSES AND INCOME TAXES (580,120) 39,213 (555,101) 49,527
------------- ------------- ------------- -------------
OTHER EXPENSES
Interest Expense - Net 43,327 12,580 67,089 36,886
Settlement of Potential Litigation - - 73,769 -
Amortization of Bridge Financing Costs - 213,958 - 606,943
------------- ------------- ------------- -------------
TOTAL OTHER EXPENSES 43,327 226,538 140,858 643,829
------------- ------------- ------------- -------------
NET LOSS BEFORE INCOME TAXES (623,447) (187,325) (695,959) (594,302)
Income Taxes - - - -
------------- ------------- ------------- -------------
NET LOSS (623,447) (187,325) (695,959) (594,302)
RETAINED (DEFICIT), BEGINNING OF PERIOD (3,020,051) (725,557) (2,947,539) (318,580)
------------- ------------- ------------- -------------
RETAINED (DEFICIT), END OF PERIOD ($3,643,498) ($912,882) ($3,643,498) ($912,882)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
LOSS PER COMMON SHARE
PRIMARY (0.19) (0.06) (0.21) (0.18)
FULLY DILUTED (0.62) (0.15) (0.60) (0.07)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (NOTE 11)
PRIMARY 3,345,397 3,345,397 3,345,397 3,345,397
FULLY DILUTED 4,888,730 4,888,730 4,888,730 4,888,730
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
PAGE 4
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss ($695,959) ($594,302)
Adjustments to Reconcile Net Loss to
Net Cash Used By Operations:
Issue of Common Stock For Marketing Agreement 187,500
Depreciation and Amortization 21,881 625,921
Non-Cash Settlement of Potential Litigation 73,762
Changes in:
Accounts Receivable 293,636 134,345
Inventories 4,208 (263,360)
Prepayments 17,065 (44,697)
Accounts Payable (1,123,540) (797,652)
Accrued Expenses and Taxes Payable 222,325 14,588
Customer Deposits 38,742 (5,328)
Changes in assets and liabilities net of effects
from purchase of Threshold Communications, Inc.
Accounts Receivable 256,347 -
Inventory (71,230) -
Prepaid Expenses (11,663) -
Accounts Payable 292,642 -
Accrued Expenses and Taxes Payable 904 -
TOTAL ADJUSTMENTS 202,579 (336,183)
---------- ---------
NET CASH USED BY
OPERATING ACTIVITIES (493,380) (930,485)
---------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES
Stockholder Loans Receivable (81,034) -
Notes Receivable arising from Common Stock
Purchase Warrants 33,300 -
Deferred Private Placement Costs (281,394) -
Deferred License Costs (30,100) -
Additions to Property and Equipment (221,545) (315,994)
Bid Deposit (322,610) -
Payment for purchase of Threshold Communications,
Inc. net of cash acquired (180,556) -
Other Assets (82,149) (107,956)
---------- ---------
NET CASH USED BY INVESTING
ACTIVITIES (1,166,088) (423,950)
---------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES
Payments of Shareholder Loans (243,071) 7,276
Proceeds of Other Loans 111,000 (45,000)
Payments of Bridge Loans - (800,000)
Payments of Bank Loans (80,000) (90,000)
Net Proceeds from Debentures 2,277,156 100,000
Principal Payments under Capital Lease Obligation (28,994) -
Sale of Common Stock 531,250 3,869,937
---------- ---------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 2,567,341 3,042,213
---------- ---------
NET INCREASE IN CASH 907,873 1,687,778
CASH, BEGINNING OF PERIODS 18,000 136,203
---------- ---------
CASH, END OF PERIODS $925,873 $1,823,981
---------- ----------
---------- ----------
See Notes to Consolidated Financial Statements.
<PAGE>
PAGE 5
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------
1996 1995
---- ----
SUPPLEMENTAL DISCLOSURE FOR CASH FLOWS
CASH PAID DURING THE YEAR FOR :
Interest $67,089 $36,886
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Property Acquired Under Capital Leases ($352,400) -
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 Metropolitan Area and
the State of New Jersey. On January 6, 1995, Electrocomm Wireless, Inc.
entered into a one year contract to utilize the transmission facilities of
an unaffiliated paging carrier to commence paging operations. The agreement
required a non-refundable one-time connection fee of $20,000, a
monthly per diem charge per radio paging customer and the Company's pro
rata share of monthly access charges. The contract expired in January and
was not renewed. The Company is in the process of securing FCC licensing
for paging, two-way radio transmission and personal communication services.
In July 1995 the Company formed Personal Communications Network, Inc. a
Delaware corporation, as a wholly owned subsidiary to participate in the
Federal Communications Commission auction for licenses to engage in
personal communications services ("PCS"). The Company has posted a bid
deposit of $1,000,000. On May 8, 1996 the Company obtained six PCS licenses
entitling it to operate wireless PCS telephone systems covering nearly 1.5
million people in three states.
On June 28, 1996, the Company acquired 51% if Threshold Communications,
Inc. (which engages in the business of providing radio paging services in
the New York Metropolitan Area.)
On March 22, 1996, Threshold Communications, Inc. ("TCI") acquired
substantially all of the assets and assumed certain liabilities of General
Communications and Electronics, Inc. ("GCE"). TCI also acquired as part of
this transaction 56 2/3% of the outstanding stock of General Towers of
America, Inc. (which engages in the business of providing two way radio
services in the New York Metropolitan Area). TCI and its subsidiary
General Towers of America, Inc. ("GTA") are treated as subsidiaries of the
company.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and
Article 10 of Regulation S-X. Accordingly, they do not necessarily include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion
of management all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the six months ended June 30, 1996 are not necessarily
indicative
<PAGE>
PAGE 7
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
(A) BUSINESS ACTIVITY AND BASIS OF PRESENTATION - (CONTINUED)
of the results that may be expected for the year ended December 31, 1996.
The unaided consolidated financial statements should be read in conjunction
with the consolidated financial statements and footnotes thereto included
in the Company's annual report on form 10-KSB for the year ended December
31, 1995.
(B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Electronics
Communications Corp., subsequent to the Acquisition, and its wholly-owned
subsidiaries, Free Trade Distributors, Inc., Trade Zone Distributors, Inc.
(Trade Zone Distributors, Inc. has a wholly owned subsidiary, Trade Zone
Distributors, II, Inc. which is an inactive, non-operating entity),
Electrocomm Wireless, Inc., Personal Communications Network, Inc. and its
majority owned subsidiary of Threshold Communications, Inc. and TCI's
majority owned subsidiary General Towers of America, Inc. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
(C) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided using
accelerated methods over the estimated useful lives of the respective
assets (5 to 7 years). Depreciation expense charged to operations for the
six months ended June 30, 1996 and 1995 was $21,881 and $18,978,
respectively.
(D) INVENTORIES
Inventories are valued at the lower of cost or market, cost is determined
using the first in, first out method.
(E) REVENUE RECOGNITION
It is the Company's policy to categorize revenue into either sales from
electronic goods, commissions for fees earned on sales of cellular radio
service contracts, or sales from its radio paging and two way radio
services. Sales from electronic goods includes but is not limited to
cellular phones and related accessories and other electronic automobile and
office products. Revenue from the above mentioned products are recognized
when they are shipped. Revenues from sales of electronic goods represented
57% of the 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-backs on
customers that prematurely terminate cellular service. In addition to the
commissions paid by the cellular radio supplier, the Company receives
co-op fees. Co-op fees are reimbursements of expenditures that are
approved by the cellular radio supplier for advertising and promotion
in connection with the sale of cellular radio contracts. Revenues from
radio paging and two way radio services are recognized in the beginning
of the month for which they are invoiced.
<PAGE>
PAGE 8
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
(F) CONCENTRATION OF CREDIT RISK
The Company maintains its major cash accounts in banks in the New York and
New Jersey Area. The total cash deposits are insured by the Federal Deposit
Insurance Corporation up to $100,000 per account.
The Company currently receives all of its commission revenue from two major
cellular radio carriers. Although there are a limited number of sources for
this type of revenue, management believes that other sources could provide
similar commissions on comparable terms. A change in carriers could cause a
delay in activation's and a loss of sales which would affect operating
results adversely.
(G) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the period. Actual results could differ from those estimates.
NOTE 2 - ACQUISITION, RECAPITALIZATION AND PUBLIC OFFERING
(A) As described in Note 1, the Company acquired all of the outstanding
common stock of the Operating Entities. For accounting purposes the
acquisition has been treated as a recapitalization of the Operating
Entities with the Operating Entities as the Acquirers (reverse
acquisition). The historical financial statements prior to January 1, 1994
are those of the Operating Entities. As a result of this transaction,
historical additional paid-in capital of the Operating Entities was
retroactively reduced and common stock increased by $58,804 for the par
value of the 1,176,086 shares of common stock received in the transaction.
Prior to the acquisition, Free Trade Distributors, Inc. had 200 shares
outstanding at $75 par value or $15,000 in common stock and $60,000 in
additional paid-in capital. The recapitalization of these shares resulted
in a transfer from common stock to additional paid-in capital of $15,000.
In 1993, Trade Zone Distributors, Inc. was capitalized and issued 200
shares of $5 par value or $1,000 in common stock. The recapitalization of
these shares resulted in a transfer from common stock to additional paid-in
capital in the amount of $1,000. As a result of the reverse acquisition,
additional paid-in capital was also reduced by $13,354 on January 1, 1994
(the effective date of the acquisition). This is reflective of the excess
liabilities assumed over the assets by the Operating Entities. On January
1, 1994, the Company sold 340,000 shares of its common stock for $50,000.
All references in the financial statements and notes thereto to the number
of shares outstanding have been restated to reflect the 1 for 5 reverse
common stock split described below. Additionally, On May 25, 1995, 47,611
shares were issued to a shareholder who did not receive the proper
allocation when the company had its reverse common split in Note 2B.
(B) On May 12, 1995 the Company successfully completed a public offering
(the "Offering").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 an aggregate 100,000 shares of Common Stock and
200,000 Common Stock Purchase Warrants. On September 12, 1995 the
Underwriter exercised
<PAGE>
PAGE 9
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - ACQUISITION, RECAPITALIZATION AND PUBLIC OFFERING - (CONTINUED)
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.
(C) On January 16, 1996 the Company consummated a Private Placement
Offering of 69,460 shares of the Company's $.05 par value common stock at a
price of $2.25 per share. The total offering resulted in gross proceeds of
$156,218 of which $116,223 was advanced to the Company prior to December
31, 1995. Each subscriber, in addition to the shares, received demand
registration rights, which require the Company to file a Registration
Statement upon request of 25% or more of the shares sold in the offering at
anytime during the 18 month period commencing 30 days from the closing
date. In March 1996, the subscribers demanded that the Company file a
Registration Statement covering their shares. The Company at that time was
unable to comply with the request. In order to avoid a potential litigation
for failing to file a Registration Statement on a timely basis, the Company
issued a aggregate of 34,715 additional shares to the subscribers. The
additional cost of these shares issued were treated as an increase of
additional paid in capital and expensed as a settlement of potential
litigation.
(D) On March 21, 1996, the Company entered into a letter of intent with an
investment banking firm (the "Placement Agent"). Pursuant to which the
Company will offer $6,000,000 principal amount of the Company's
Subordinated Convertible Debenture (the "Debenture"). The principle amount
of the Debentures shall be convertible into shares of the Company's common
stock at the option of the holder, immediately upon issuance, at a price
equivalent to 25% discount from the average high closing bid price for five
days prior to the conversion or $1.50, whichever is less. The Debenture
bears interest at the rate of 5% per annum payable on April 1 of each year
commencing April 1, 1997. The Debentures are redeemable and callable for
conversion under certain circumstances and are due April 1, 2002. The
Company has advanced to the Placement Agent a placement fee equal to 10% of
the gross proceeds, a 2% non-accountable expense allowance and to issue
200,000 Warrants to purchases the Company's common stock at $2.25 per
share. The Company intends to use the proceeds of this offering to increase
its deposit in the PCS auction, build out its paging system and general
working capital purposes. On June 25, 1996 $400,000 was converted into
266,667 shares of Common Stock in accordance with the Debenture.
(E) On April 8, 1996, the Company entered into a contractual agreement
with a public relations and direct marketing firm for the intention of
making its name and business better know to shareholders, investors and
brokerage houses. The agreement is for a period of four months. The
Company issued 100,000 shares of its Common Stock and expensed $187,500 for
Marketing Cost.
(F) On May 22, 1996, the Company completed a private placement of 500,000
shares of unregistered Common Stock for $625,000 ($1.25 per share). These
shares were sold at a $.75 (37.5%) discount to the market price of the
Company's Common Stock on such date. This transaction was negotiated at
arms length with the investors. The primary reasons why the discount was
so large, was based on the aggregate amount of the shares relative to the
total number of shares outstanding, the limited liquidity in the Company's
Common Stock at such time, and the fact the Common Stock was unregistered.
Management determined that it was in the best interest of the Company to
sell such shares, because the Company required large capital infusions to
make the payments to the FCC for the six PCS licenses the Company obtained
on May 8, 1996. The Company paid $93,750 in associated placement fees and
legal costs.
(G) On June 28, 1996, the Company purchased 51% of the common stock of TCI
and its majority owned subsidiary GTA for $725,000 in cash and $389,000 of
its common stock (194,500 shares at $2.00 per share).
<PAGE>
PAGE 10
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - ACQUISITION, RECAPITALIZATION AND PUBLIC OFFERING - (CONTINUED)
The following unaudited pro forma combined results of operations for the
six months ended June 30, 1996 accounts for the acquisition as if it had
occurred on January 1, 1996. The pro forma results give effect to the
amortization of goodwill.
UNAUDITED PRO FORMA COMBINED RESULTS OF OPERATIONS
Six Months Ended
June 30, 1996
----------------
Sales $5,665,327
Net Earnings (846,943)
Net Earnings Per Common Share ($.25)
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts Receivable consist of amounts due for sales of electronic goods,
commissions due from major cellular radio suppliers and from sales of radio
paging and two way radio service. Components of Accounts Receivable are
$1,132,851 for the sale of electronic goods, $282,697 for commissions,
and $299,708 for the sale of radio paging and two way radio service at June
30, 1996 and $1,503,303, $782,473 and $ -0- at December 31, 1995.
NOTE 4 - OTHER ASSETS
(A) Deferred private placement costs consist of certain legal, accounting,
printing fees and other costs in connection with the private placement
described in Note 2D. 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.
(C) The Paging Carrier Agreement consist of six paging licenses with
various paging carriers. The Cost of such agreements are being amortized
over a fifteen year period.
NOTE 5 - LOAN RECEIVABLE
As of December 31, 1995, the Company has loaned $550,000 to TCI. TCI is a
recently formed corporation engaged in the radio paging business, having
acquired a paging subscriber base, associated paging hardware, and a paging
carrier agreement with SkyTel-Registered Trademark-, a company that
provides nationwide paging, voice messaging and related messaging services
to subscribers and others. TCI has informed the Company that it intends to
engage in the radio paging carrier business utilizing, among other assets,
one or more 900 megahertz FCC paging licenses for the New York-New Jersey
area, a long-term lease for a paging transmission site in New Jersey which
it currently owns, and a customer base of approximately 9,000 paging
service subscribers. The principal shareholder of TCI is not a related
party.
On March 22, 1996, TCI has entered into an agreement to acquire
approximately 6,000 paging service subscribers and other related assets.
The Company has advanced 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.
<PAGE>
PAGE 11
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - LOAN RECEIVABLE - (CONTINUED)
On November 1, 1995, the Company entered into an agreement (the
"Agreement") with TCI which superseded a prior agreement between the
parties. Under the Agreement, in consideration of the aforesaid advances
and guarantees, the Company obtained an exclusive option from TCI to
acquire or invest in TCI on terms to be mutually agreed upon. The option
agreement further provides that if, on or before January 31, 1996, the
acquisition of TCI by the Company or an investment by the Company in TCI
has not been consummated, the Company may demand repayment of these
advances. If such advances are not repaid within ten business days of such
demand, the Company, at its option, may foreclose on 100% of the stock of
TCI which has been pledged as collateral for the advances. The Agreement
recites that the specific terms of any acquisition of or investment in TCI
cannot be determined at this time and that the Company is under no
obligation to complete any such transaction. Any such transaction will
require the approval of the Board of Directors of the Company and will be
subject to the entry into definitive written agreements.
On June 28, 1996, TCI satisfied its indebtedness to the Company as
described by the transaction in Note 2G.
On June 30, 1996 the loan receivable consists solely of a note due from one
of the Company's consultants. This note is due December 31, 1996 and bears
an interest rate of 8% payable on demand.
NOTE 6 - BID DEPOSIT
The Company had participated in a Federal Communications Commission (the
FCC) auction for Personal Communication Services licenses. The FCC required
an advance payment in the amount of $1,000,000 which 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.
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 June 30, 1996 with interest at 10%, are payable on demand.
Payment of the notes are personally guaranteed by certain officers and
stockholders, and secured by a pledge of their personal property.
On February 29, 1996, the Company entered into a financing arrangement with
a corporation in the amount of $134,000. Interest is payable at a rate of
10% in monthly installments of $1,117 per month. As additional
consideration, the Company issued the corporation 800,000 "A" warrants with
90 day registration rights and "piggy back" registration rights with any
other offering of the Company.
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.
(B) Notes Payable-Bridge Financing consisted of an aggregate of $800,000,
12% promissory notes, with principal and interest due on the earlier of the
closing of the Public Offering or November 1,
<PAGE>
PAGE 12
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - NOTES PAYABLE - (CONTINUED)
1995. Payment of the notes were secured by a security interest in the
Company's accounts receivable, a pledge of the shares of Common Stock of the
Company owned by its officers,directors and certain stockholders, and was
guaranteed by the Company's President. In connection with the bridge
financing the Company issued to the investors an aggregate of 240,000 shares
of Series A Preferred Stock (the "Preferred Stock") and 480,000 Series A
Preferred Stock Purchase Warrants (the "Preferred Warrants") with a Fair
Value of $511,500. Each Bridge investor exchanged their their Preferred
Stock and Preferred Warrants into an identical number of shares of Common
Stock and Class A Redeemable Common Stock Purchase Warrants on the effective
date of the Offering. These notes were paid on May 19, 1995.
(C) On April 18, 1995, the Company entered into a financing agreement with
a bank in the amount of $100,000. This loan is personally guaranteed by the
Company's President, cross corporate guaranteed by Free Trade and secured
by the Company's inventory. Interest is payable monthly at the rate of 1.5%
per annum in excess of the bank's fluctuating prime lending rate. As of the
date hereof, the interest rate was 10.5%. The loan becomes due and payable
on April 18, 1996. At June 30, 1996 the balance on this loan was $45,000.
This note was temporally extended by the bank. On June 17, 1996 the bank
extended the due date until April 17, 1997.
(D) On October 6, 1995, the Company entered into a lending arrangement with
a bank. In connection therewith, the Company could borrow up to $700,000
at an interest rate of 3/4% above the bank's base lending rate, payable on
demand. At December 31, 1995, the interest rate was 9.5%. The Company
deposited a $700,000 three month certificate of deposit with the bank as
collateral for such loan. The Certificate earns a 5% interest. The loan is
also secured by certain officers' personal guarantees, 245,000 shares of
their stock and all the assets of the Company. On January 6, 1996 and then
again on April 6, 1996 the bank extended the due date 90 days. The note has
been extended until October 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 has been extended until September 22, 1996.
NOTE 8 - CAPITAL LEASE
Capital Leases include $163,834 for equipment. Minimum future lease
payments under capital leases as of June 30, 1996 for each of the next five
years and in the aggregate are:
1996 $99,247
1997 149,806
1998 132,448
1999 130,870
2000 114,122
----------
Total Minimum Lease Payments 624,493
Less: Amount Representing Interest (174,042)
----------
Present Value of Net
Minimum Lease Payments 452,451
Less: Current Maturities
included in Current Liabilities (77,170)
----------
Long Term Obligations Under
Capital Leases $375,281
----------
----------
<PAGE>
PAGE 13
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - CAPITAL LEASE - (Continued)
The interest rates on the capitalized leases rage from 10% to 29.17% and
are imputed based on the lower of the Company's incremental borrowing rate
at the inception of each lease or the lessors implicit rate of return.
NOTE 9 - NOTES PAYABLE-STOCKHOLDERS
Notes Payable-Stockholders are unsecured and payable on demand with
interest at rates from 7.5% to 10.65% per annum on the outstanding
principal at June 30, 1996 and December 31, 1995.
NOTE 10 - OTHER ADVERTISING AND PROMOTIONAL SERVICES
On July 21, 1995, the Company entered into an Advertising and Promotional
Services Agreement, pursuant to which the Company agreed to issue 200,000
shares of its Common Stock, $.05 par value, in exchange for services
provided to the Company. These services included analysis, advice,
advertising and promotional ideas and marketing campaign in connection with
the Company's development of its distribution of cellular products in South
America. The Company issued the stock to the consultant on August 8, 1995
which resulted in a non-cash expense of $1,075,000 in the year ending
December 31, 1995.
NOTE 11 - EARNINGS PER COMMON SHARE
The Company computes earning (loss) per common share by dividing the net
income (loss) by the weighted average number of common stock and dilutive
equivalent shares outstanding, as retroactively adjusted to reflect shares
issued for the business combination described in Note 1A and the 1 for 5
reverse common stock split described in Note 2A, and common stock
equivalents outstanding during the period.
NOTE 12 - CONVERTIBLE PREFERRED STOCK
The Series A Preferred Stock was issued in connection with the Bridge
Financing described in Note 7B. On May 19, 1995, the holders of preferred
stock have exchanged the 240,000 shares of Series A Preferred Stock for
240,000 shares of Common Stock. As a result of the conversion, additional
paid-in capital was reduced by $9,600.
NOTE 13 - WARRANTS TO PURCHASE COMMON STOCK
The Company approved the sale to certain officers, directors and
stockholders of 1,000,000 Common Stock Purchase B Warrants at a price of
$.10 per Warrant exercisable at $5.00 per share. On November 30, 1994,
the Company issued 990,000 Common Stock Purchase B Warrants for $.10 per
Warrant, payable by the Company accepting promissory notes bearing interest
at 8% per annum due on the earlier of the exercise of the Warrants, or
December 1, 1996. On January 20, 1995, the Company agreed to reduce the
exercise price of 300,000 B Warrants from $5.00 to $2.50 and amended the
exercise period of these 300,000 B Warrants so that they are not exercisable
until February 1, 1996.
NOTE 14 - INCOME TAXES
The Company adopted the liability method of accounting for income taxes, as
set forth in Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Under the liability method, deferred taxes
are determined based on the differences between the financial statement and
tax basis of assets and liabilities at enacted tax rates in effect in the
years in which the differences are expected to reverse. The Company has net
operating loss carryforwards that it does not expect to utilize pursuant
to the Internal Revenue Regulations.
<PAGE>
PAGE 14
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - CONTINGENT LIABILITIES
(A) On December 1, 1994, the Company entered into an employment agreement
with the President of the Company for a term of five years with an option
for an additional three one year terms. The agreement provides for annual
compensation of $150,000 during the term of the employment agreement and
entitles the President to certain fringe benefits, including automobile
maintenance, disability insurance, medical benefits and life insurance
coverage. The President has agreed that during the term of his agreement
and for 12 months thereafter (unless the agreement is terminated without
cause), he will be subject to non-competition provisions. Upon termination
of employment without cause, the President will be entitled to a lump sum
payment of $75,000 multiplied by the number of years of his employment by
the Company.
(B) The Company has engaged a management company, which is an affiliate of
the Underwriter used in the Public Offering described in Note 2B, as the
Company's management consultant, for a period of 15 months commencing
December 14, 1994, at a fee of $75,000 (exclusive of out-of-pocket
expenses), which was paid on May 12, 1995. In addition, the Company has
agreed, subject to any required regulatory approvals, to pay the
Representative a finder's fee, in the event that the Representative
originates within five years following the Effective Date of the offering a
merger, acquisition, joint venture or other transaction to which the
Company is party, in the amount equal to 5% of the first $4,000,000, 4% of
the next $1,000,000, 3% of the next $1,000,000 and 2% of the excess, if
any, over $6,000,000 of the consideration actually received by the Company
in any such transaction.
(C) On June 1, 1995, the Company entered into a consulting agreement with a
corporation owned by four of the Company's legal representatives for
non-legal services. In consideration for services performed by the
consultant the Company agreed to pay $144,000 per year for five years
payable in monthly installments of $12,000.
(D) On May 17, 1995, the Company entered into an employment agreement with
Mr. Les Winder, which was amended on October 1, 1995. The term of the
agreement is for five years with an option for additional one year terms.
The agreement provides for annual compensation of $137,500 during the term
of the employment agreement and entitles Mr. Winder to certain fringe
benefits, including automobile maintenance, disability insurance, medical
benefits and life insurance coverage. Mr. Winder has agreed that during the
term of his agreement and for 6 months thereafter (unless the agreement is
terminated without cause), he will be subject to non-competition provisions.
Upon termination of employment without cause, Mr. Winder will be entitled to
a lump sum payment of $50,000 multiplied by the number of years of his
employment by the Company
NOTE 16 - MAJOR SUPPLIERS
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 June 30, 1996 and June 30, 1995 was $76,657 and $29,798
respectively.
On May 20, 1994 Free Trade Distributors Inc. entered into a five year
operating lease expiring May 31, 1999 for an 8,000 square foot warehouse
and office facility.
On May 15, 1996, the Company entered into a five year operating lease
expiring May 31, 2001 for a 14,000 square foot warehouse and office
facility.
<PAGE>
PAGE 15
ELECTRONICS COMMUNICATION CORP, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - OPERATING LEASE - (CONTINUED)
The minimum future rental payments under these non-cancelable operating
lease for each of the remaining years are:
1996 $ 85,443
1997 170,888
1998 170,888
1999 135,888
2000 110,888
---------
Total Minimum Future
Rental Payments $673,995
---------
---------
NOTE 18 - AMENDMENT TO CERTIFICATE OF INCORPORATION
On March 12, 1996, at a meeting of the Company's shareholders a majority of
the Company's shareholders voted in favor of an amendment to the Company's
Certificate of Incorporation to increase the number of authorized shares of
the Company's common stock from 8,400,000 to 40,000,000.
NOTE 19 - STOCK OPTION PLAN
The Company's Board of Directors adopted a Stock Option Plan (the "Plan"),
which was approved by Stockholders, under which, options to purchase up
to an aggregate of 500,000 shares of Common Stock are available for grants
to officers, directors, consultants and key employees of the Company. The
Plan provides for the grant of incentive stock options, non-qualified
stock options and Director's options. The Plan will terminate in 2004,
unless sooner terminated by the Board of Directors. As a result of the
reverse split the Board of Directors, with stockholders approval, increased
the number of shares of Common Stock, after the effective date of the
reverse split, which may be subject to options granted under the Plan from
100,000 to 300,000. On July 10, 1995 the Company issued 20,000 options to a
director of the Company at a price of $3.80, 5,000 of these options were
exercisable immediately, 5,000 on July 10, 1996, 5,000 on July 10, 1997 and
5,000 on July 10,1998 and expire on July 10, 2,000. The fair value of the
stock was less than the option price therefore no compensation expense was
recognized in 1995.
NOTE 20 - PENDING LITIGATION
On March 4, 1996 the Company commenced an action entitled Electronics
Communications Corp. as Plaintiff against Toshiba America Consumer
Products, Inc. ("Toshiba") and Audiovox Corporation, case number 96 Civ.
1565 in United States District Court, Southern District of New York. The
complaint asserts claims for antitrust, breach of contract, tortious
interference with contract and tortious interference with prospective
economic advantage and business relations. The complaint seeks damages in
excess of $ 5,000,000. This action was commenced because the Company
expended significant monies and resources including the issuance of 200,000
shares of the Company's Common Stock to a consultant in anticipation of
South American cellular telephone program which the Company was to
undertake exclusively 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
increase Net Income for the three months ended June 30, 1996 by
<PAGE>
PAGE 16
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 - CORRECTION OF AN ERROR - (CONTINUED)
$73,769 ($.02 per share.) There was no effect to the Net Income for the
six months ended June 30, 1996. The transaction was originally recorded in
the three months ended June 30, 1996, the restatement gives effect to the
transaction being properly recorded in the three months ended March 31,
1996.
<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
