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FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1996
Commission File Number: 0-24486
ELECTRONICS COMMUNICATIONS CORP.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 11-2649088
(State or other jurisdiction of (I.R.S Employer Identification No.)
incorporation or organization)
10 PLOG ROAD, FAIRFIELD, NEW JERSEY 07004
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 808-8862
Securities registered pursuant to Section 12 (b) of the Act:
TITLE OF EACH NAME OF EACH EXCHANGE ON WHICH EACH CLASS IS
CLASS REGISTERED
Common Stock, $.05 par value NASDAQ/BOSTON STOCK EXCHANGE
Class A Redeemable Warrants NASDAQ/BOSTON STOCK EXCHANGE
Securities registered pursuant to Section 12 (g) of the Act: None
(Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained herein, and will not be contained,
to the best of registrants knowledge, in definitive proxy or information
statements by reference in Part III of this Form 10-KSB or any amendment to the
Form 10-KSB. [X]
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
State issuer's revenue for its most recent fiscal year, $7,357,437
As of March 21, 1996, the aggregate value of the registrant's voting
stock held by non-affiliates was $16,690,341.60, computed by multiplying the
last reported bid price on March 21, 1997 by the number of shares of common
stock held by persons other than officers, directors or by record holders of 10%
or more of the registrant's outstanding common stock. This characterization of
officers, directors and 10% or more beneficial owners as affiliates is for
purposes of computation only and is not an admission for any purposes that such
persons are affiliates of the registrant.
As of March 21, 1997, there were 12,195,515 shares of the registrant's
common stock, $.05 par value, issued and outstanding.
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The following documents are incorporated by reference in Part I of this
Annual Report:
(a) The Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1995;
(b) The Company's Amended Annual Report on Form 10-KSB/A-1 for the
fiscal year ended December 31, 1995;
(c) The Company's Amended Annual Report on Form 10-KSB/A-2 for the
fiscal year ended December 31, 1995;
(d) The Company's Amended Annual Report on Form 10-KSB/A-3 for the
fiscal year ended December 31, 1995;
(e) The Company's Quarterly Report on Form 10-QSB for the quarter
ended March 31, 1996;
(f) The Company's Amended Quarterly Report on Form 10-QSB/A-1 for
the quarter ended March 31, 1996;
(g) The Company's Quarterly Report on Form 10-QSB for the quarter
ended June 30, 1996;
(h) The Company's Amended Quarterly Report on Form 10-QSB/A-1 for
the quarter ended June 30, 1996;
(i) The Company's Prospectus filed pursuant to Rule 424(b) on May
15, 1995 as part of Registration No. 33-89336;
(j) The Company's Form 8-K dated June 28, 1996;
(k) The Company's Amended Form 8-K/A-1 dated June 28, 1996;
(l) The Company's Amended Form 8-K/A-2 dated June 28, 1996;
(m) The Company's Quarterly Report on Form 10-QSB for the quarter
ended September 30, 1996;
(n) The Company's Amended Quarterly Report on Form 10-QSB/A-1 for
the quarter ended September 30, 1996; and
(o) Registration Statement and Pre-Effective Amendment 4 on Form
S-3, File No. 333-4778.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
A. BUSINESS OF THE COMPANY AND ITS SUBSIDIARIES
ECC is a Delaware corporation formed in 1984. The Company
principally carries on its business through three wholly-owned subsidiaries,
Free Trade Distributors, Inc., Trade Zone Distributors, Inc. and
Electrocomm Wireless, Inc., and two majority owned subsidiaries,
Personal Communications Network, Inc. and Threshold Communications, Inc.
A summary description of the business of each subsidiary follows:
PERSONAL COMMUNICATIONS NETWORK, INC. ("PCN") was formed in 1995 for
the purpose of bidding in the C-Block FCC auction for the personal
communications spectrum, and to operate a PCS network in the post-auction
environment. ECC successfully bid for six 30 MHz broadband licenses in five
states (New York, Pennsylvania, Vermont, Maine and New Hampshire), paying an
average of $17.80 per "POP," for over 1.5 million "POPS." This compares to the
average auction price of $39.88 per "POP." PCN's markets were selected for their
complement to the Company's regional footprint in the northeastern United
States, the ability of such markets to be "linked" for contiguous coverage,
their strategic positioning and value to adjacent cellular networks, and the
joint venture opportunities expected to be presented, relating to the
highly-valued northeast corridor.
It is the Company's intention and strategy with respect to PCN to
finance and build a wireless telecommunications network, and to provide wireless
residential and business telephone service, with the ability to transition into
the mobile environment utilizing one telephone number. Although the Company has
preliminarily determined to utilize the Code Division Multiple Access ("CDMA")
technology as the platform for PCN, it will continue to explore all four of the
principal commercially
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viable PCS technologies, with due consideration of obtaining the maximum
aggregate and roaming access and service for its customer base, both existing
and anticipated or potential. The Company is currently in negotiations with PCS
infrastructure and equipment vendors who will utilize CDMA technology. (See,
"Competing Technologies; Initial Selection of CDMA Technology".)
FREE TRADE DISTRIBUTORS, INC. ("FREE TRADE") is ECC's wireless,
wholesale product distribution subsidiary, carrying the latest models of top
brand cellular, paging, two-way radio, and mobile data products and accessories.
Through long-standing relationships with such manufacturers as Motorola, Sony,
NEC, Ericsson and Nokia, and the Company's volume buying power, the Company
believes it will be able to negotiate favorable pricing and pass these discounts
on to its retail subsidiaries and their dealer networks. Historically, Free
Trade's principal activity and revenue were derived from its operation as a
wholesale electronics product distribution business. However, as the Company
seeks to evolve into a full-service wireless telecommunications company, Free
Trade's contribution to the corporate and revenue mix has been substantially
reduced, and this subsidiary has been repositioned as an "accommodation"
business to support ECC's retail business and dealer networks.
TRADE ZONE DISTRIBUTORS, INC. ("TRADE ZONE") is a "Master Agent" of
Bell Atlantic NYNEX Mobile Inc. ("BANMC"), the surviving company of the merger
of Bell Atlantic Systems, Inc. ("Bell Atlantic") and NYNEX Mobile
Communications, Inc. ("NYNEX"). The Company, advertising its services as ECC,
through May, 1996 was activating on average over 1,000 subscribers per month,
making it BANMC's "outstanding agent" for sales, three years running. Through
the balance of 1996, activations ranged between 364 to 955 per month, which the
Company believes is reflective of BANMC's change of marketing approach, pursuant
to which BANMC began offering directly to customers various attractive programs
and packages not offered through dealers. In 1995, the Company activated over
18,000 new subscribers. As of December 1, 1996, the Company had booked
approximately 40,000 activations. Sixty percent of its activations are generated
through the Company's retail telemarketing operation, the balance through its
network of authorized dealers. (See "Solicitations for Mobile Cellular Telephone
Activations," below in this Section.)
ELECTROCOMM WIRELESS, INC. ("ELECTROCOMM") is an FCC-authorized and
licensed paging and two-way radio services provider. Electrocomm holds two FCC
900 MHz paging licenses for the greater New York area (extending to greater
Philadelphia and southern Connecticut) and seven FCC 470 MHz two-way radio
licenses, "trunked" together to form a network that encompasses a 50-mile radius
around New York City. Electrocomm is not an operating company and merely holds
these FCC Licenses, which are utilized by the Company. The Company has recently
completed construction of a 900 MHz FlexTM, digital satellite-based paging
network, manufactured by Glenayre, which includes 36 FCC-approved paging antenna
sites, 30 of which are operational, and the balance of which are anticipated to
be operational by August, 1997. The Company's seven (7) two-way radio sites are
"trunked" together to form a region-wide seamless network. The paging and
two-way radio operations are carried in the name of and are booked by ECC, not
Electrocomm. The development of the Company's paging and two-way radio business
is expected to more positively impact on Company revenues in 1997, as
activations accelerate, although the Company has only recently begun to develop
a customer base for this service, and it may be some time before substantial
income is derived from this activity, and there can be no assurance that this
activity will fully materialize to the substantial levels anticipated.
THRESHOLD COMMUNICATIONS, INC. ("TCI") In 1996, ECC acquired a
fifty-one (51%) percent ownership in TCI, which, in turn, owns General
Communications and Electronics, Inc. ("General Communications") and 56.667% of
General Towers of America, Inc. General Communications has
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been in the paging business for more than 25 years, and supports approximately
7,500 active subscribers (primarily corporate rather than individual retail
customers); with approximately 500 new subscribers being added each month. TCI
is a full-service paging company, with a computerized billing system,
experienced customer service reps and full sales and marketing services. Its
current and rapidly growing subscriber base provides the Company with a
positive cash flow. 49% of TCI is owned by Joseph P. Albanese, Sr., who was
primarily responsible for arranging for the acquisition and transfer of General
Communications to TCI, and the subsequent acquisition of TCI by the Company,
including a key FCC 900 MHz license, utilized in the operations of Electrocomm,
and in securing and transferring to the Company certain premises and facilities
located in West Orange, New Jersey.
GENERAL DISCUSSION AND OVERVIEW
As at May 1996, the Company may be deemed to have redirected its
operations and business away from acting as a distributor of consumer, home and
office electronics products, such as electronic organizers, telecopier and
photocopy machines, telephones, etc., which has been its principal focus for
more than the past three years, and to have committed to operations as a
multi-faceted, wireless, telecommunications company. At the present time, the
Company derives most of its revenue from cellular telephone activation
commissions, relating to the Company's direct sales and solicitations for
subscriptions for mobile cellular telephone activations and service. Due to
market and other conditions, it is anticipated that in the near term such
activation commissions will be materially reduced, and that in the future the
great majority of the Company's revenues will be derived from its paging and PCS
operations.
The change in the direction and focus of the Company was precipitated
by the anticipated continued growth and profit potentials in the rapidly
emerging market and utilization of wireless communications, and concomitantly by
a deteriorating and shrinking market for the distribution of electronics
products, accentuated by the concentration of large retailers such as The Wiz,
Circuit City, The Incredible Universe, and others, serving in a dual role and
capacity as both distributor and retailer.
The Company's transition to the wireless telecommunications arena was
most specifically enhanced and facilitated by: (i) the Company's successful
build-out of the its new, state-of-the-art, digital Glenayre 900 MHz,
satellite-based, FlexTM Paging Network (the "Paging Network"), serving customers
in New York, New Jersey, Connecticut and Philadelphia, which became operational
on or about November 10, 1996; (ii) the development and acquisition of a trunked
two-way radio system, covering New York and New Jersey; and (iii) the Company's
successful bid at FCC auction for six PCS licenses, covering the PCS License
Area.
However, very substantial capital expenditures will be required to
build-out the infrastructure necessary to operate the Company's PCS system in
its PCS License Area. Therefore, despite a prior operating history, due to its
recent change in direction, and anticipated substantial additional capital and
development requirements, the Company may be considered to be at the
developmental stage, and prior results of operations may bear little
relationship to future operations and anticipated results of operations.
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BUSINESS STRATEGY
The Company intends to act as a full-service regional telecommunications
company which Management believes is well-positioned to take advantage of
the rapidly emerging wireless marketplace with state-of-the-art technologies.
The Company believes that there is, and will be, a growing demand for
accessibility and portability, among both business and individual customers
and users, and increasing reliance on "anywhere-anytime" wireless
communication, creating a growing market for users who need and will
require integrated, discrete and elegant wireless solutions compatible
with vastly expanding work-days and workplaces, creating an evolving
"working lifestyle."
Therefore, it is the Company's strategy and intention to finance and
build a wireless communications network, and to provide wireless residential,
business and commercial telephone service, with the ability to transition into
the mobile environment utilizing one telephone number. Thus, it is ECC's
marketing and distribution strategy to make it simple and convenient for
businesses and consumers to take advantage of the latest wireless products and
services by providing one-stop shopping by phone. ECC is positioning itself to
be the telemarketing, channel-dominant wireless product sales and service
operation in the northeast.
CURRENT MARKETING
At the retail level, ECC currently creates demand for its products and
services by aggressively advertising regular sales specials and promoting a
one-call-does-it-all 800 number: 1-800-NYNEX 31 or 1-800-ANYWHERE, which has
been approved by BANMC. ECC spends approximately $750,000 annually on
advertising, and is one of the largest cellular advertisers in New York, behind
AT&T and BANMC. Co-op ad dollars from BANMC, based on ECC's cellular
activations, help to substantially fund cellular advertising. BANMC has
substantially modified its co-op advertising for fiscal 1997, which is still
being negotiated, but which is anticipated to be substantially reduced from
prior levels. A substantially similar strategy is in the process of being
deployed for ECC's paging subsidiary, Electrocomm Wireless, utilizing the same
or another easily remembered 800 number, and proven telemarketing and
distribution strategy.
ECC's in-house telemarketing team handles sales calls to the 1-800
number. Through its on-line activation system with BANMC, ECC is able to conduct
a credit check and get a telephone number activated within one-half hour. The
product is then pulled from the inventory of ECC's wholesale product subsidiary
(Free Trade) and shipped by overnight courier for 24-hour delivery. The Company
operates what Management believes to be one of the most efficient customer
fulfillment center in the northeast, making this type of turnaround possible and
cost-effective. ECC's fully-automated inventory management system is able to
identify and locate product in inventory in seconds using UPC bar-coding,
package and the order's various components and track, on-line, its delivery.
At the wholesale level, ECC supports a large network of "Authorized
Dealers" with cellular and paging service and product. This dealer network
consists of car stereo shops, cellular telephone specialists, mobile electronics
dealers, consumer electronics stores and independent paging resellers. These
companies fax their cellular and paging service requests to ECC, which in turn
provides them, in near-time, with credit approval and a telephone number or
pager number. This dealer network is also able to purchase product through Free
Trade Distributors to take advantage of the Company's volume buying power and
access to the latest products and top name brands.
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Historically, approximately sixty (60%) percent of ECC's cellular
activations come through the Company's retail channels, and 40 percent through
its dealer network. ECC anticipates continued growth of its retail business as
promotion of its paging business gets underway, and the Company is able to
handle service requests through its Internet home page. Internet address:
"WWW.GOANYWHERE.COM." The Company also expects to increase its advertising in
the coming years to accommodate the growing consumer market for other wireless
products and services.
PCS OPERATIONS
Through its participation in the FCC's auction reserved for small
businesses, on May 8, 1996, the Company's subsidiary, Personal Communications
Network, Inc. ("PCN"), was awarded six PCS licenses at the FCC's recently
concluded FCC "C" Block Auction, entitling the Company to build and operate
wireless PCS telephone systems covering approximately 1.5 million people
("POPS" -- potential customers) in the following markets: New York --
Elmira-Corning-Hornell; Maine -- Bangor/Lewiston-Auburn/Waterville-Augusta; and
Vermont -- Burlington/Rutland-Bennington (herein previously referred to as the
"PCS License Area"). The Company believes that this clustering approach will
provide for operational efficiencies, lower infrastructure costs, more efficient
network build-out, and ultimately in lower prices for the Company's wireless
telecommunications services.
<TABLE>
<CAPTION>
PCN Auction Results Overview
(Auction began December 18, 1995 - ended May 6, 1996)
MARKET BTA POPS NET BID COST/POP
- ------ --- ---- ------- --------
<S> <C> <C> <C> <C>
Burlington, VT B063 369,128 $8,721,000 $23.63
Rutland-Bennington, VT B388 97,987 $2,850,375 $29,09 (high bid)
Bangor, ME B030 316,838 $4,130,250 $13.04
Lewiston-Auburn, ME B251 221,697 $4,626,000 $20.87
Waterville-Augusta, ME B465 165,671 $1,961,250 $11.84 (low bid)
Elmira-Corning-Hornell, NY B127 315,038 $4,163,325 $13.22
------- ---------- ------
1,486,359* $26,452,200 $17.80**
<FN>
*NOTE: Using 1995 U.S. government population figures, versus the 1990 census
figures used in the auction, PCN has approximately 1.6 million POPs, at a net
cost of $17.21/POP.
**NOTE: The average price per POP at the FCC auction was $39.88. Given this,
and using what Management believes is a more conservative $35/POP valuation,
PCN's POPs could represent a potentialvalue of up to $52.5 million. However,
the Company has not received any offer that would support any such valuation,
and such valuation should be considered as both speculative and unreliable.
</TABLE>
The Company's winning bids at the FCC Auction aggregated $26,452,200,
net of the 25% discount allowed to small businesses such as the Company under
the terms of the auction. The Company initially made a $1,000,000 refundable
upfront payment with the FCC to be eligible to bid at auction. The upfront
payment of $1,000,000 was supplemented after the auction with an additional
payment of $322,610, to satisfy the initial 5% down payment for the increased
bid as actually made by the Company. In September, 1996, the Company was
required to post an additional $1,322,610 with the FCC, representing the second
half of the required total deposit of 10% of its winning bids, for a total of
$2,645,220. (The "FCC License Fee" amounted to $17.80 per POP, which is
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substantially below the auction average of $39.88 per POP); (however, although
other successful bidders included in the overall award have obtained licenses
for areas with greater population concentration, and higher per capita income,
thus accounting for differences in the price per POP). The remaining balance
of the FCC License Fee was evidenced by six (6) ten-year Promissory Notes,
issued by PCN to the FCC, bearing interest at the rate of 7% per annum (the
"FCC Notes"). The FCC Notes are payable in quarterly installments of interest
only for the first six (6) years, and four (4) years of principal plus interest
thereafter. The FCC Notes are secured by the FCC Licenses only.
Assuming that the Company can arrange for financing for the build-out
of its PCS system, it intends to operate digital networks, through which the
Company will provide low-cost, advanced wireless telecommunications services
in the PCS License Area, targeting several categories of customers, including
home, business and other commercial customers with respect to both their local
and long distance usage. The Company will seek to expand the regional footprint
of its wireless networks throughout the United States through a combination of
prospective affiliations, alliances, acquisitions (anticipated to be on an
exchange of stock basis), and through roaming agreements with other PCS
carriers.
The Company believes that the demand for wireless telecommunications
will continue to grow dramatically in the next several years, and that PCS will
capture a significant share of the wireless market. Currently, wireless
penetration in the U.S. is estimated to be 13% and is expected to exceed 47% by
2006. As reported by the Cellular Telecommunications Industry Association
("CTIA"), the compound annual growth rate of cellular subscribers exceeded 45%
from 1993 through 1995. Despite this rapid growth in the number of cellular
subscribers, wireless "Minutes of Use" ("MOUs") represents only a small portion
of total telecommunications traffic, due in part to capacity constraints which
discourage cellular providers from aggressively pricing their services. The
Company believes that the demand for wireless service is highly elastic and that
the anticipated lower cost and superior quality of PCS service will fuel growth
in the wireless telecommunications market.
As a successful bidder for its 30 MHz licenses, the Company is required
to make service available to at least one-third of the population in its market
within five years, and at least two-thirds of the population within ten years of
the grant of the FCC licenses.
The cost of building the PCS systems infrastructure is difficult to
estimate with certainty. The Company is in the process of surveying the number
of switches and cell cites which will be required to be placed in the PCS
License Area. The cost of a switch will be approximately $2,000,000 and between
$150,000 to $300,000 per cell site. Preliminary estimates indicate that a full
build-out of an operating PCS system throughout the License Area will cost
approximately sixty million dollars ($60,000,000), with approximately twenty
million dollars ($20,000,000) required in the first three (3) years, and the
balance required over approximately the next seven (7) succeeding years. Based
on this capital requirement, it is anticipated that the Company will require
either a significant and substantial joint venture partner, substantial vendor
financing, or some other means of financing to construct the infrastructure for
its PCS system. There can be no assurance that any of these mechanisms will be
available to the Company, and if available, that such funding will be available
on terms acceptable to the Company.
To facilitate the required buildout of its PCS services, and to expand
its capabilities, reach and scope in the emerging PCS segment of the wireless
communications market, the Company, through PCN, entered into a strategic resale
agreement with Next Wave Telecom, Inc. ("NextWave"), believed by management to
be the nation's third largest licensee of PCS licenses.
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Under the terms of the Company's ten (10) year strategic resale
agreement with NextWave, the Company guaranteed that it would purchase five
billion (5,000,000,000) MOUs from NextWave, in that entity's capacity as a
wholesale carrier. The Company does not currently have the capability or
capacity to fulfill that obligation. In addition, that arrangement contemplates
that PCN will market a variety of wireless PCS services nationwide, with the
exception of New Jersey, where the Company resells cellular radio services as
an agent for Bell Atlantic NYNEX Mobile, and, as to which area the Company is
restricted in PCS operations by the terms of its agreement with Bell Atlantic.
By virtue of its resale of PCS services and airtime on NextWave's
network (i.e., the wholesale purchase of MOU's) PCN anticipates that it will be
able to offer high quality competitively priced wireless communications services
under its own name to small businesses and customers in major markets throughout
the United States, without substantial additional capital investment and without
purchasing MOU's from direct competitors. It is anticipated that this resale
arrangement will translate into very substantial additional revenue for each
of PCN and NextWave. In addition, the Company has discussed and anticipates
entering into arrangements through NextWave to obtain vendor financing to assist
in or to provide for its build-out and its inventory of PCS equipment for
resale. (See "Equipment and Vendors; Related Capital Needs," below.)
Through its participation in the same FCC auction in which the Company
was awarded its licenses, NextWave was the winning bidder for 63 PCS markets,
representing 110 million POPS. NextWave's licenses cover 29% of the top United
States markets, including New York, Los Angeles, Washington/Baltimore, Boston,
Houston, Minneapolis, Denver, Seattle, Portland and San Diego. In pursuance of
its bids, as shown in its Registration Statement on Form S-1, as filed with the
Commission, NextWave deposited approximately $210,000,000 with the FCC.
NextWave was formed on May 16, 1995, and is a holding company with
three wholly-owned subsidiaries, NextWave Personal Communications Inc.
("NextWave PCI"), TELE-Code and NextWave Wireless Inc. ("NextWave Wireless").
NextWave PCI was formed to acquire PCS licenses in the FCC's PCS auctions.
TELE-Code was formed to develop CDMA-based products and provide engineering
services to the Company and others. NextWave was formed to act as an operating
company and intends to form subsidiaries for each of the Company's seven regions
and any clusters of additional markets that may comprise operating regions. As
also shown in its recently filed Registration Statement, NextWave has raised an
aggregate of approximately $450 million in private capital to finance its
acquisition of PCS licenses at FCC auction.
However, NextWave is a development stage enterprise and has incurred
net losses since inception. To date, NextWave's revenues have been limited to
minimal TELE-Code consulting services and consequently, there can be no
assurance that NextWave will succeed or survive as a viable business.
NextWave intends to operate primarily as a "carrier's carrier,"
wholesaling low-cost MOUs to a broad range of sellers. NextWave plans to target
several categories of customers, including long distance companies, the Regional
Bell Operating Company ("RBOCs") and other Local Exchange Carriers ("LECs"),
Competitive Access Providers ("CAPs"), and other major PCS retailers, cellular
service providers, utilities, cable television system operators and independent
resellers, as well as retailers and manufacturers of mass-market consumer
products and services.
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COMPETING PCS TECHNOLOGIES; INITIAL SELECTION OF CDMA TECHNOLOGY
There are several competing technologies available to choose from in
constructing a PCS system. All the PCS technologies increase cell capacity
by splitting conversations into tiny bits of information. The fragments are
reassembled to form a steady conversation, in the same way individual frames
of a film form constant movement. But the methods of doing so have key
differences. The four (4) potential PCS technologies which currently appear
to be commercially viable are: (i) Code Division Multiple Access ("CDMA"),
which sends fragments of conversations across many different frequencies
that simultaneously carry other conversations. Of the many bits of
information your handset receives, you hear only the pieces that are
designated for you with a code that tags each fragment, which, as reported
by the U.S. Department of Commerce's Office of Telecommunications in
May, 1996, is the technology on which U.S. carriers have allocated the most
money. It has been reported that Sprint Spectrum alone has awarded
$3.2 billion in contracts for its CDMA technology. MCI will begin offering
CDMA next year; (ii) Time Division Multiple Access ("TDMA"), the technology
adopted by both AT&T Wireless and Rogers Cantel in Canada, which sends
fragments over one frequency. The frequency is shared by up to three callers.
The fragments are lined up in order, so your handset picks up only those
fragments intended for you; (iii) Global System for Mobile Communications
("GSM") is a variation of TDMA common in Europe and Asia, and the first
operating system established in the United States (Washington, D.C.), as
reported by the U.S. Department of Commerce's Office of Telecommunications
in May, 1996, to be the worldwide leader; and (iv) Personal Access
Communication System ("PACS") anticipated to be adopted by 21st Century
Telesis Joint Venture, in Jackson, Mississippi and South Bend, Indiana
during the fourth quarter of 1996 and also anticipated to be adopted to
service Alaska.
The technologies are incompatible. That means that if you choose one
carrier, you generally will not be able to use your mobile telephone in an area
that does not have your carrier's technology. However, many markets will have
several technologies. For instance, it is contemplated that New York will have
CDMA, TDMA and GSM. Callers using any technology can talk with customers using
any PCS technology or "old-fashioned" analog telephones; but while traveling,
CDMA customers, for example, must use a CDMA carrier. Cellular customers who
travel between cities or areas will have to make inquiry of their cellular
carrier to determine if there are arrangements with carriers in that area using
the same technology as their carrier. Eventually, it is contemplated that one
technology will likely dominate the country. It is likely that the market may
determine which technology works best, not the providers -- in much the same
way that the market chose between "VHS" and "Betamax" in the video recorder
competition. As noted above, while GSM may currently be the world leader,
in the United States, carriers have allocated the most money for CDMA.
After preliminary investigation and analysis, the Company believes
that CDMA technology is best suited to accomplishing its business objective
of providing high volume, high quality airtime at a low cost. CDMA has been
widely adopted by both cellular and PCS providers both domestically and
internationally. In the U.S., AirTouch Communications has commenced commercial
CDMA service in the Los Angeles market, and Bell Atlantic NYNEX Mobile has
launched commercial CDMA service in selected cities in the state of New Jersey.
Most of the other leading cellular service providers, including ALLTEL Mobile,
Ameritech, Comcast Cellular Communications, GTE Mobilnet, 360 Communications
and US West, have announced plans for commercial deployment CDMA networks in
their markets. In addition, Sprint Spectrum L.P., MCI, PrimeCo Personal
Communications, L.P., GTE and Ameritech have announced plans for build-out and
operation of CDMA system in their PCS markets. The Company believes that CDMA
provides important system performance benefits over the existing alternatives.
Nonetheless, the Company will continue to survey
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all technologies before committing to utilize any special technology in
connection with its system construction.
VOICE QUALITY. CDMA systems offer more powerful error correction, less
susceptibility to fading and reduced interference. Using the 13 kbps vocoder,
CDMA systems achieve voice quality that is comparable to the typical wireline
telephone. CDMA vocoder technology also employs adaptive equalization which
filters out annoying background noise more effectively than existing wireline
or analog cellular phones.
CALL VOLUME. CDMA technology is designed to permit a greater number of
calls within one allocated frequency, and reuses the entire frequency spectrum
in each cell, rather than using only one-seventh of the available spectrum
in each cell which is typically the case with analog technology, TDMA and GSM
systems. CDMA systems are expected to provide capacity gains of up to 1000%
over the current analog system, while TDMA and GSM systems are expected to
increase capacity by 100% to 300%.
CDMA technology is designed to provide flexible or "soft" capacity
which will permit a system operator to temporarily increase the number of
telephone calls that can be handled within a cell. When capacity limitations
in analog, TDMA and GSM systems are reached, additional callers in a given
cell must be given a busy signal. Using CDMA technology, the system operator
will be able to allow a small degradation in voice quality to provide a
temporary increase in capacity. This is expected to reduce blocked calls
and increase the probability of a successful cell-to-cell hand-off.
SOFT HAND-OFF. CDMA systems transfer calls throughout the network using
a technique referred to as soft hand-off, which connects a mobile customer's
call with a new cell site while maintaining a connection with the cell currently
in use. CDMA networks monitor the quality of the transmission received by both
cell sites simultaneously to select a better transmission path and to ensure
that the network does not disconnect the call in one cell until it is clearly
established in a new one. As a result, fewer calls are dropped compared to
analog, TDMA and GSM networks which use a "hard hand-off" and disconnect the
call from the current cell site before connecting it with a new one.
FEWER CELL SITES. Because of efficient digital modulation, soft
hand-off capabilities and other technological advantages, networks using CDMA
are also able to achieve a greater radius of coverage and therefore require
fewer cells than analog, TDMA or GSM systems when the system is lightly loaded.
Recent network build-outs by cellular CDMA operators indicate that 50% fewer
cells are required for CDMA systems as compared to analog systems. Similarly,
CDMA systems are expected to require 30-50% fewer cells than TDMA or GSM
networks under similarly lightly loaded conditions. The need for fewer cells
results in significant reductions in overall capital requirements, lower
ongoing maintenance and operating costs, fewer cell sites to be acquired and
greater flexibility in network design.
ADVANCED SERVICE AND FEATURES. CDMA will permit the Company to offer
advanced feature such as simultaneous voice and data transmission and,
ultimately, high-speed wireless applications such as video, multimedia and
ISDN-rate data services.
PRIVACY AND SECRECY. One of the benefits of CDMA technology is that it
combines a constantly changing coding scheme with a low power signal to enhance
security and privacy. Vendors are
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currently developing additional encryption capabilities which will further
enhance overall network security.
SIMPLIFIED FREQUENCY PLANNING. Frequency planning is the process by
which wireless service providers analyze and test alternative patterns of
frequency use within their systems to minimize interference and maximize
capacity. Currently, cellular service providers spend considerable cost and time
on frequency planning. Because TDMA and GSM based systems have frequency reuse
constraints similar to present analog systems, frequency reuse planning for TDMA
and GSM based systems is expected to be comparable to planning for the current
analog systems. With CDMA technology, however, the same subset of allocated
frequencies can be reused in every cell, substantially reducing the need for
costly frequency reuse patterning and constant frequency plan management.
PRODUCTS AND SERVICES
In general, the new PCS microcellular technology utilizes more base
stations in a given area than would be used by a traditional cellular system,
so that PSC phones can work at a lower power level than cellular phones,
enabling the batteries to last substantially longer. Because the PCS service
utilizes the higher frequencies recently auctioned by the FCC, the PCS signals
are able to travel further and penetrate buildings and structures far better
than analog cellular service. The advanced cellular PCS phones anticipated to
be sold by the Company will feature a fully enhanced digital display, and
will offer paging, fax and E-mail and Caller ID capabilities.
The Company intends to offer a variety of specialized mobile wireless
services through its wireless CDMA technology. The Company expects its networks
will support features designed to increase usage and provide consumers greater
capabilities in call management, including the following:
ADVANCED HANDSETS. CDMA handsets will offer 48-hour standby time and
four-hour talk time. These handsets will be equipped with preprogrammed features
such as speed dial and last number redial. These handsets will be sold under the
Company's name.
CALLER ID. The Company's networks will be capable of displaying the
telephone number of the incoming caller on the customer's handset (commonly
referred to as "Caller ID"), allowing the customer to decide whether or not to
accept the call or route it to voice-mail.
OVER-THE-AIR ACTIVATION. This feature will allow consumers to purchase
a shrink-wrapped handset "off the shelf" at a retail location, and at their
convenience, place the first call automatically to an activation center and
have service initiated in a short period of time by programming the handset
over the air. The Company believes over-the-air activation will reduce the
Company's or any reseller's cost of customer activation.
INTEGRATED ADVANCED PAGING. The Company anticipates introducing
integrated advanced paging which will allow the handset to signal the receipt
of an incoming message and provide test messaging via the handset, thereby
eliminating the need for a separate paging unit. The handset will have the
capability to respond to incoming messages through pre-programmed responses
or new user defined messages.
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VOICE-MAIL. This feature operates like an answering machine. A message
waiting indicator on the handset notifies the subscriber of a new message. The
Company plans to introduce the ability to "listen in" as a message is being
left, with the option to take the call or automatically call back.
CUSTOM CALLING FEATURES. Additional features which the Company
anticipates offering include call waiting, call forwarding, distinctive ringing
and call blocking.
The Company believes that additional new features and services will be
developed to take advantage of CDMA technology and intends to offer a portfolio
of products to accommodate the growth in, and the unique requirements of, high
speed data traffic. The Company also plans to address a number of applications
for wireless data services which are currently envisioned (eg., facsimile,
wireless local area networks, point-of-sale terminal connections). Additionally,
NextWave intends to implement an Advanced Intelligent Network ("AIN") platform
and integrate it into its service, offering to provide resellers, such as the
Company, with the capability to customize services and features for specific
customer groups.
EQUIPMENT VENDORS; RELATED CAPITAL NEEDS
The Company intends to rely on NextWave as its strategic resale partner
and consultant with respect to the build-out of its PCS system, in connection
with determining the technical performance and pricing for CDMA systems for
PCS. NextWave has advised the Company that it is currently engaged in product
selection and vendor contract negotiations for its seven regions. There are
over 20 companies worldwide that are licensed to manufacture and supply CDMA
network equipment, including Lucent Technologies, Hughes Network Systems,
Hyundai Electronics, LG InfoComm ("LGIC"), Motorola, NEC, Northern Telecom
and Samsung Electronics to manufacture and sell CDMA network equipment. In
addition, Alps Electric, AT&T, Fujitsu, Hyundai Electronics, LGIC, Maxom
Electronics, Mitsubishi, Motorola, NEC, NOKIA Mobile Phones, OKI Electric,
Matsushita (Panasonic), Nippon Denzo, QUALCOMM, Samsung Electronics, SONY
Electronics and SANYO Electric are licensed to manufacture and sell CDMA
subscriber equipment. The Company intends to deploy equipment from multiple
vendors in its networks.
In addition to pursuing activities under its resale agreement with
NextWave, PCN continues to discuss its strategic arrangement with NextWave
to collaborate on PCS network design, construction, and equipment purchases,
financing and strategic allocations in anticipation of an equipment shortage
in the market until manufacturing capabilities catch up with anticipated
demand. In addition to the substantial capital that will be required to meet
PCN's obligations under the FCC Notes, the Company will be required to obtain
and expend substantial capital to build-out the PCS facilities to operate
its PCS system within the PSC License Area, and to purchase equipment for
inventory and resale.
By virtue of its strategic arrangement with NextWave, it is anticipated
that NextWave may provide sources of capital or bank or other institutional
financing to assist the Company with respect to these capital needs, or will
otherwise assist PCN in vendor financed or assisted construction and supply;
provided, however, that the Company has not obtained any written agreement from
NextWave in this connection; and there is no assurance that NextWave will not
develop alternative relationships. Moreover, there can be no assurance that the
Company's relationship with NextWave will be successful, or will continue, or
that NextWave will be successful, or continue to survive as a viable entity,
or that other factors and circumstances may not evolve which would adversely
impact on the availability of such financing. The Company, to the extent it
is not able to finance its PCS system
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build-out from future cash flow or from its own banking or other financing
arrangements, may be required to engage in additional sales of its Common
Stock or other securities, representing further potential dilution, or to
enter into an arrangement with a strategic partner for such construction
in consideration of an allocation of profits, if any, or it may be required,
or may be required to attempt, to sell some or all of its FCC Licenses.
DIGITAL SATELLITE-BASED PAGING SERVICES AND TWO-WAY MOBILE RADIO SERVICES
The Company, through Electrocomm, operates its paging and two-way mobile
radio services pursuant to two paging licenses from the FCC, covering all
of metropolitan New York, the entire State of New Jersey, Long Island, lower
Connecticut, Westchester, Rockland County and downtown Philadelphia (the
"Paging Service Area"). In addition, Electrocomm is an FCC licensed two-way
mobile radio services provider, operating a 470 MHz dispatch radio system
in the New York Metropolitan Area. Electrocomm recently commenced full
operations as a radio paging carrier. Commencing on or about November 10, 1996,
Electrocomm had in place 36 paging transmitter sites and began operating its
"state-of-the-art" Glenayre 900 MHz satellite-based FlexTM paging network,
utilizing 18 of its 36 constructed sites. The remaining 18 of the Company's
sites are anticipated to be fully operational by year end 1996. In anticipation
of this, the Company began marketing its paging services in mid-1996.
Radio paging began more than four decades ago as an adjunct to telephone
answering services, delivering tone-only messages (and later tone and voice
messages) to subscribers. Beginning in the 1970's, cost-effective technological
innovations and regulatory reforms helped to accelerate the use of radio paging
services. Advances in microprocessor technology facilitated dramatic reductions
in the size and weight of pagers. In 1982, the FCC increased the number of
available channels for paging, further stimulating growth of the industry.
Factors contributing to the rapid growth in the paging industry include:
(i) a continuing shift towards a service-based economy and a resultant need
to keep in contact; (ii) increasing mobility among workers; (iii) increasing
awareness of the benefits of mobile communications; (iv) reduction in the
price of pagers and service; (v) product distribution through several retail
channels, and (vi) increasing availability of information services which may be
transmitted to pagers.
Paging is an inexpensive means of communication. Paging can also be
combined with cellular telephone service as a means to control the costs of
incoming cellular call traffic. When called by an outside party, the paging
system typically prompts the caller for information, such as the telephone
number of the caller or a message, and then routes the information to the paging
receiver.
There are generally four types of paging services: tone-only, tone and
voice, digital display and alphanumeric, all requiring the user to carry a
compact paging receiver.
The tone-only service is the most basic of the radio paging systems
and requires a smaller spectrum and less costly pagers than the other paging
services. Tone-only paging receivers have been reduced to approximately the
size and weight of a small pocket calculator. A person wishing to reach a
tone-only subscriber dials a telephone number which activates computerized
automatic paging equipment, which in turn, triggers a transmission to the
subscriber's pager causing it to "beep." The alerted subscriber then telephones
his or her office, home or other pre-arranged message center to receive the
message.
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The tone and voice paging unit is generally slightly larger than the
tone-only paging unit. As with tone-only paging, a person wishing to page a
subscriber with the tone and voice services dials a telephone number in order
to have the subscriber's pager activated. However, with this service the caller
may leave a brief voice message which is recorded by the answering computer.
The computer then activates a transmitter which alerts and broadcasts the
caller's voice message through the subscriber's pager. The number of tone and
voice pagers that can be accommodated on a frequency is significantly less than
the number of tone-only pagers because voice transmission uses more air time.
Accordingly, pricing varies with the type of service provided.
Digital display paging is now the most prevalent paging service and
allows a caller, using a touch tone telephone, to transmit digital messages
generally up to 12 digits at a time (for example, telephone numbers or a code
indicate pre-arranged messages) to a display pater. The subscriber is alerted
by a "beep" tone and the numerical message is displayed on a liquid crystal
display screen on the pager.
An alphanumeric pager can display words as well as numbers, and up to
2,000 characters divided into up to 40 different messages can be displayed on
its typically dot matrix liquid crystal display screen. This pager enables the
subscriber to know who is calling and the purpose and urgency of the call. It
also may be used to transmit various types of data to one or more subscribers
simultaneously. Unlike a digital message, however, alpha message cannot be
entered from a touch tone phone. The alphanumeric paging system requires a
subscriber-owned personal computer, a paging company dispatch service or, a
telephone answering service as an input source.
In connection with its new satellite-based FlexTM Paging System, the
Company will also offer additional value-added services to customers, such as
voice retrieval paging, which permits a person wishing to convey a message to
a paging subscriber to call a telephone number and dictate his or her message
to a voice mail computer. In a similar manner, the Company's new system will
allow a caller to transmit a faxed document upon the selection of that option
from an announced menu. Upon receipt of any digital, voice message or
telecopier transmission, the subscriber's digital pager is then activated,
alerting the subscriber that a message is waiting. Once alerted, the subscriber
may, at his/her convenience, telephone to have the caller's message
automatically replayed, or to have the telecopier transmission relayed to a
"fax number" of the subscriber's choice -- using call forward functions.
Numerous messages and types and forms of messages can be stored for the
subscriber with this type of service, which also allows the subscriber to
retrieve the stored messages at his or her convenience -- even months later.
Voice retrieval paging can, therefore, be viewed as a form of fully automated
telephone answering service.
The availability of value-added paging products and services such as
voice retrieval paging and information services, is creating demand within
certain market segments which previously had not been attracted by the benefits
of basic paging services alone. Demand for paging services is anticipated to
increase further as a result of technological advances which permit messaging
to be integrated into lap and palm top computers and into consumer products
such as wrist watches
On March 22, 1996 TCI acquired substantially all of the assets,
including the name of General Communications. As part of this transaction, TCI
also acquired 56-2/3% of the outstanding stock of General Towers of America,
Inc., which also engages in two-way radio services in the Metropolitan New York
Area. As a result of the transaction with GCE, in addition to the paging
transmission site which it previously owned, TCI became a paging reseller and
paging air-time for third party carriers. TCI offers paging service primarily
through various paging carriers in the New York Metropolitan
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Area. TCI offers national paging service through a sales and distribution
agreement with Skytel. Under this agreement, TCI pursues regional and national
accounts through its present dealer network in the Paging Service Area. At the
present time, TCI has approximately 7,500 subscribers. TCI also has the
necessary infrastructure to operate paging operations, including, but not
limited to, a full service technical shop and repair facility, engineering
capabilities, marketing and sales, billing and collection systems, and
ancillary product support capability for paging related products.
On June 28, 1996 the Company acquired 51% of the stock of TCI, upon the
recasting of its agreements and arrangements with Joseph P. Albanese, Sr.,
including the termination of certain options and other agreements. The aggregate
cost for the purchase of 51% of TCI was $1,114,000. The Company will now utilize
TCI's infrastructure in the operations of its own paging system.
Electrocomm has completed the acquisition of seven two-way mobile radio
licenses in the UHF band and offers dispatch communications over the frequencies
utilizing mobile trunking technology. The system provides users with reliable
two-way radio communication. For a fixed monthly fee, users can have two-way
radio communications with their employees, delivery vehicles, service personnel
or others that may require 24 hour radio dispatching service throughout the
Metropolitan Paging Service Area. Unlike cellular, private two-way users can
communicate only amongst themselves, but at a considerably reduced expense.
The system will have a limited number of users, but such users generally do not
change systems for an extended period of time. As of the date hereof
Electrocomm has approximately 200 uses subscribing its two-way radio system.
Management believes that common carrier paging and private mobile radio
are natural enhancements to its existing business and is of the opinion that
it can sell its paging service through its existing network of cellular retail
dealers. In addition, the Company expects to sell paging and has begun selling
two-way mobile radio services to customers directly through its own direct
sales force.
SOLICITATIONS FOR MOBILE CELLULAR TELEPHONE ACTIVATIONS
Cellular telephone service may be defined as access to a cellular
telephone system through the assignment of a unique mobile telephone number
enabling the subscriber to make local and long distance telephone calls from a
wireless cellular telephone in all areas where a cellular telephone system has
been established. Once a connection to the cellular telephone system has been
established, calls may be placed to any landline phone, or to cellular phones in
any area in which a cellular telephone system exists. Such service is normally
sold by the cellular telephone carriers on an annual or month-to-month basis by
charging monthly access fees, per minute use fees, and charges for long distance
calls.
The two operating licensed cellular wireless service providers in the
New York and New Jersey Cellular Geographic Service Area (CGSA) are Bell
Atlantic NYNEX Mobile Communications, Inc. ("BANMC"), and AT&T Wireless
Communications, Inc., formerly Cellular One ("AT&T"). BANMC is a newly formed
corporation, which was the result of the Bell Atlantic Mobile Systems, Inc.
("Bell Atlantic") and NYNEX Mobile Communications, Inc. ("NYNEX") merger of
their respective cellular operations. BANMC'S CGSA now reaches from North
Carolina to Maine. Through its Trade Zone subsidiary, the Company has separate
agreements with each of NYNEX and Bell Atlantic, which in the aggregate covers
the Washington/Baltimore area northward through the New York Metropolitan area.
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The Company is an authorized agent of BANMC, through agreements with
each of NYNEX and Bell Atlantic. While there are other agents in the market, the
Company believes it is currently only one of two active BANMC agents authorized
to appoint sub-agents. Management describes this ability to appoint sub-agents
as a Master Agency relationship. The terms of this agreement allow sub-agents
appointed by the Company to use the carrier's trademarks in their advertising
with the carrier's service in the Metropolitan New York Area. The Company
receives applications for cellular service from dealers or sub-agents and also
by direct sales to corporate and individual users. These applications are then
processed through the Company's computers which are interfaced directly into
BANMC computers. In turn, BANMC approves or denies credit. If credit is
approved, the Company then assigns a cellular phone number to the customer. The
Company maintains sophisticated computer hardware and software which fully
tracks all activation and ancillary commission income due to the Company from
BANMC. No one sub-agent or dealer has accounted for greater than 5% of the
Company's cellular service revenues and accordingly, the Company does not rely
on any sub-agent or dealer for a material portion of its cellular service
revenue.
The Company receives a one time fee on a sliding scale of $263.00 to
$325.00 for every new customer that is issued a mobile phone number during the
term of the contracts. This fee fluctuates based on the number of subscribers
activated during any given month. The Company must refund this commission if the
phone number is terminated within the first six months of activation or the
customer becomes delinquent in its payments during such time. In the event the
phone is terminated or the customer becomes delinquent within the first six
months of the contract, the carrier charges back the commission to the Company
which the Company in turn charges back to the sub-agent. The Company's agreement
with NYNEX expired on November 1, 1996, and NYNEX and the Company have extended
that contract for three (3) months, and two successive thirty day periods,
pending submission of a new agreement by NYNEX and the mutual agreement on the
terms and conditions of that agreement between NYNEX and the Company.
The Company's contract with Bell Atlantic runs through January 31,
1998. For a period of up to three years from the date of activation, the Company
receives a 5% residual commission from phone numbers placed in the old NYNEX
CGSA of the customers "air time" telephone bill, and receives a 3% residual from
phone numbers placed in the old Bell Atlantic CGSA until the Company's agreement
expires, or is terminated. "Air time" telephone bill means total bill less
taxes, toll calls and access charges. The Bell Atlantic Agreement which covers
New Jersey, southward to Baltimore/Washington DC prohibits the Company's sale of
PCS, while the NYNEX Agreement, which principally covers Metropolitan New York,
does not.
During 1995/96, the Company received 100% of its cellular service
income from BANMC, representing 45% of its consolidated gross sales. However,
certain disagreements have arisen between the Company and Bell Atlantic in
connection with a debit card program promoted by Bell Atlantic. In this
connection, Bell Atlantic has asserted that the Company is indebted to it for
$249,000 in monthly access fees and fraud charges. The dispute evolves around
whether a $24.99 monthly access fee was waived by Bell Atlantic as an inducement
to obtain the Company's participation in this program and whether the Company is
responsible for third-party mobile telephone cloning fraud. The Company has
asserted, and counsel for Bell Atlantic now admits, that there was and is no
basis to charge back the Company for cloning fraud.
That the $24.99 access fee in dispute, was waived by Bell Atlantic has
been confirmed to the Company by a former Bell Atlantic employee, who negotiated
the terms of the debit card program with the Company during his tenure with Bell
Atlantic as an account manager. Current Bell Atlantic
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employees dispute this claim of waiver. Complicating the matter and the overall
relationship, is the fact that various current BANMC representatives have
attempted to coerce the Company's capitulation with respect to the payment of
both the access fees and the fraud charges, by holding back activation
commission payments otherwise due, and by insisting that these amounts be paid
before there is any discussion with respect to the renewal of the NYNEX Agency
Agreement now expired and on extension. BANMC is now holding back approximately
$75,000 in activation commissions due to the Company, purportedly as security
for the payment of the $249,000 in access charges claimed to be due.
Counsel for the Company and Bell Atlantic are attempting to work
cooperatively to ferret out the underlying facts and circumstances, in an effort
to avoid a litigation, which from the Company's point of view, will include,
among other things, claims of economic coercion against BANMC. These discussions
appear to already have had salutory results and have confirmed that if the
$24.99 access charges are agreed to be zeroed out, the Company would owe an
outstanding balance of only approximately $95,723. Of that amount, the Company
disputes that any substantial amounts are due to roaming charges, as it
proscribed the inclusion of such charges within its debit card program with Bell
Atlantic. If fair and appropriate arrangements with respect to these claims and
the payment of the Company's commissions can not be achieved (Example: If BANMC
is unwilling to waive all or part of the $24.99 access charges and is unwilling
to correct its charges for roaming use, which the Company specified would not be
a part of the debit card program), it is likely that litigation will result. In
turn, this may cause BANMC to fail or refuse to renew the Company's respective
agreements with NYNEX and/or Bell Atlantic.
In the event BANMC elects to terminate, or fails to renew, either part
of its relationship with the Company, this could have an immediate adverse
impact on the business of the Company. In such a case, management would attempt
to replace BANMC with another cellular carrier or wireless service provider.
However, the Company's efforts in this regard could be substantially limited by
the terms of certain non-competition provisions in its Agreements with NYNEX and
Bell Atlantic; although the NYNEX contract pertains to cellular only; and
subject to the disavowal of such restrictions, based on claims of breach and bad
faith on the part of BANMC. At best, the successful assertion of such claims is
greatly uncertain. The Company believes it could make up some of this business
by becoming an agent for PCS Services. If the Company's Agency Agreements with
BANMC are terminated, its trailing commissions will also terminate.
Separately, NYNEX, but not Bell Atlantic, has objected to the inclusion
of the logo "NYNEX" in the Company's advertised telephone number:
"1-800-NYNEX-31." Advertising of this number had been approved by Bell Atlantic
for more than the past year; and the Company believes this is a misunderstanding
emanating from what are now two affiliates. However, even if NYNEX did not
relent on its current position, and precluded the Company from advertising the
"1-800-NYNEX-31" number, the Company will be able to maintain the prior
telephone number and will be able to advertise that number using the underlying
digits. The Company can not determine what effect, if any, this change might
have on its activations; although other easily remembered numbers may be
promoted.
COMPETITION
With respect to its mobile cellular telephone activities, the Company
competes against agents for AT&T Wireless Services, Inc. ("AT&T") which is the
only other cellular service carrier in the New York Metropolitan Area and New
Jersey that the Company does not have a contractual
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arrangement with. In the opinion of Management, BANMC provides similar service
to its customers and accordingly, Management believes it can compete with
agents representing AT&T. The Company also competes with one other active
master agent for BANMC, this master agent enjoys a similar relationship with
BANMC as the Company. This agent has more assets, personnel and greater
resources than the Company. Lastly, the Company competes directly with BANMC
which maintains its own retail outlets for cellular service. BANMC also has
substantially greater assets, personnel and resources than the Company.
Additionally, if BANMC decides to terminate its relationship with the Company,
or if it refuses to allow the Company to market its PCS services in the License
Area and in the CGSA, while remaining an agent for BANMC (either through NYNEX
or Bell Atlantic), this would virtually cease this portion of the Company's
operations. In such case, management would attempt to replace its BANMC with a
similar arrangement with AT&T and re-commence operations of this portion of the
Company's business. However, there can be no assurance that AT&T Wireless,
which will be a competitor of the Company with respect to PCS, will allow the
Company to offer Commercial Radio Service ("CRS") for it while also offering
PCS services.
The Company competes with other companies which provide paging or other
mobile communications services in the geographic area in which the Company
operates. These include both large and small paging services providers and
regional telephone companies such as Bell Atlantic, NYNEX. Many of these
companies have substantially greater financial, technical and other resources
than the Company. Paging Network, Inc., the largest provider of paging services
in the United States, has operations in the New York/New Jersey Metropolitan
Area.
Competition for subscribers in the paging business is based primarily
on the quality, price and breadth of services offered (including geographic
coverage in each market served). Since the receiving equipment is virtually
identical, companies differentiate themselves by marketing, channels of
distribution, price competition, the variety of service options and breadth of
service coverage (more transmitters covering a larger territory) and customer
service.
There are several new technologies being developed and tested which
could compete with cellular and paging technology in the provision of
telecommunications. It is too early in the development of these technologies to
accurately predict their impact on the market for the Company's products and
services.
PCS is a new technology and service and, as a result, the level and
timing of development of a customer base for PCS applications, on which the
Company's future revenues depend significantly, is uncertain. In development of
the PCS market, the Company will be competing with the more established cellular
industry, as well as other wireless communications technologies, existing and
future, with similar applications. Many of the Company's PCS and cellular
telephone competitors, including joint ventures including some of the nation's
largest regional and long distance telephone carriers, have substantially
greater access to capital than the Company, substantially greater technical,
marketing, sales and distribution resources than those of the Company and
significantly greater experience than the Company in providing wireless
services.
The success of the Company's PCS service business will depend upon its
ability to compete, especially with respect to features such as data and voice
transmission, call waiting, call forwarding and paging capacity, pricing,
availability and reliability of its service, with other cellular operators,
existing PCS licensees and one or more winners of future FCC spectrum auctions
and other potential future wireless communications providers.
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The Company also faces competition from other communications
technologies such as Specialized Mobile Radio ("SMR") and operations in the
220-222 MHz band. SMR systems operate in the 800-900 MHz bands. The Company
believes that SMR systems are operational in all or virtually all of the markets
that the Company currently serves as a paging and two-way mobile operator, in
which it holds PCS licenses, and in which it expects to engage in the resale of
PCS. In general, so-called "trunked" SMR systems provide mobile radio and other
enhanced communications services, include data transmission to and from
vehicles. These systems are regarded as a low-cost alternative to cellular and
have operated substantially fewer channels (e.g., 5 frequencies) than cellular
systems enjoy. However, the current trend in the SMR industry has been toward
the consolidation of small SMR systems, thereby enabling the deployment of
regional and national multi-channel systems; at least one company expects
eventually to provide seamless coverage from coast-to-coast. Many SMRS systems
offer urban and rural users automatic interconnected service as well as
traditional dispatch communications (usable on cellular). In this regard, the
FCC has facilitated the operations of multiple site, high capacity, regional SMR
systems that will use digital multiple access technologies. These systems, known
as enhanced SMR (or "ESMR") are owned or managed by large, well-funded entities
and are capable of competing head to head with cellular and PCS operations.
Considered an outgrowth of the SMR industry are carriers licensed on 220-222 MHz
frequency band. They provide SMR-like service, albeit utilizing narrowband
technology which is materially different from that presently utilized by SMRs,
but which can still provide a low cost and potentially viable mobile dispatch
service. The impact that these newer systems will have on the SMR, cellular and
PCS industries remains to be seen. In addition, the Company believes that PCS
will also compete more directly with traditional landline telephone service
providers, with cable operators who expand into the offering of traditional
"wireless telecommunications services" over their wired system, and with other
emerging radio technologies including mobile satellite systems. (See also, "B.
The Wireless Telecommunications Industry -- Competition.")
OPERATIONAL/FINANCIAL AND REVENUE TRACKING SYSTEMS
In conjunction with the development and operation of the Company's
Paging System the Company developed, customized and implemented a computerized
customer service, billing, activation, and management system for the purpose of
controlling, tracking and managing the Company's financial and revenue
operations. This management system is utilized in connection with the Company's
cellular solicitations, paging, and potentially its PCS sales, service and
operation.
The Company's custom designed system operates in the micro-environment
as a Local Area Network ("LAN") controlling and generating customer billing,
accounts receivable, telemarketing, sales management, and data base management.
In the macro-environment, operating as a Wide Area Network ("WAN"), allowing for
remote data entry, and remote access to the West Orange, New Jersey switching
facility, whereby customer service personnel and re-sellers can remotely
activate and de-activate pagers. The WAN also encompasses operations related to
the management and monitoring of the paging network infrastructure and
monitoring of the paging network infrastructure and the associated satellite
up-link and controllers. This WAN capability assures maximum levels of service,
with minimum downtime.
Management believes that the LAN and WAN capabilities and the existing
hardware of its computerized financial and revenue tracking systems are
sufficiently advanced and sophisticated to fully service the Company's present
and future needs for at least the next five (5) to six (6) years with respect to
its paging operations, including as fully developed in the Paging Service Area
- -- anticipated
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to expand to service a capacity of 600,000 customers; and that such systems and
software, with appropriate additions, will be adequate with respect to its
future and anticipated PCS operations.
EMPLOYEES
The Company has 34 full-time employees, five (5) in executive
management, two (2) in Warehouse/Shipping, five (5) in sales, five (5) in
telemarketing, four (4) in accounting, and three (3) administrative personnel,
four (4) in customer service, two (2) in engineering, and four (4) in technical
services. These include a paging system engineer, whose duties include oversight
of the construction of the Company's paging infrastructure. In addition, the
engineer is in charge of the Company's digital paging switch facility, located
in West Orange, New Jersey. Upon completion of the paging network, the chief
engineer will be responsible for daily operation and maintenance of the paging
system, system upgrades, antenna alignment, switching facility operations, and
satellite systems interface, and uplink controllers. The Company also employs a
Vice President of Sales with 15 years of paging and wireless communications
sales management expertise. The Vice President of sales is charged with
developing the Company's overall approach to the market, channel specific sales
goals, management of the wholesale sales force, and evaluation of new products
and services which might fit into the Company's ongoing sales operations. The
Company also employs a Director of Marketing responsible for management of the
telemarketing sales group as well as development and implementation of retail
marketing sales programs, advertising, and promotion.
B. THE WIRELESS TELECOMMUNICATIONS INDUSTRY
OVERVIEW
Demand for wireless telecommunications services has grown dramatically
since its commercial introduction in 1983. This demand is largely attributable
to the widespread availability and increasing affordability of mobile
technology, paging and other emerging wireless telecommunications services.
Technological advances and a regulatory environment more favorable to
competition have also served to stimulate market growth.
PERSONAL COMMUNICATIONS SERVICE
PCS is expected to include a number of attractive features, such as:
(i) the provision of all services to one untethered, mobile number, (ii) low
priced service options, (iii) in the near future, medium-speed data
transmissions to and from portable computers, advanced paging services and
facsimile services and (iv) increased security and fraud protection. Although a
number of cellular companies currently offer digital wireless service, the
Company believes that PCS providers will be the first commercial wireless voice
telecommunications providers to offer digital mobile networks on a nationwide
basis. In addition, PCS providers may be the first to offer mass market wireless
local loop applications in the United States, as an extension of and an
alternative to, switched and direct access local telecommunications services.
The Company believes that the experience of international markets where
PCS has already been introduced provides support for the Company's expectation
of rapid growth of PCS in the United States. For example, the successful launch
of PCS networks in the U.K., in a market with two
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established cellular operators, is generally believed to have stimulated demand
and increased penetration rates in the entire country. In less than two years,
the U.K.'s two PCS operators have gained over 600,000 subscribers, representing
approximately a 15.5% share of the total wireless market and 40% of new
wireless subscribers over the same period. In the Baltimore/Washington DC
market, Sprint Spectrum L.P. has operated a commercial PCS operation since
November 15, 1995, with more than 80,000 subscribers as of May 1996.
PCS VERSUS CELLULAR
Wireless telecommunications service is currently available using either
analog or digital technology. The majority of cellular services transmit voice
and data signals over analog-based networks by varying the amplitude or
frequency of one continuous electronic signal transmitted over a single radio
channel. However, cellular systems are being converted to operate in a digital
mode. Although it is more widely developed than digital, analog technology today
has several limitations, including limited capacity, inconsistent service
quality (eg., poor voice quality and dropped calls), lack of effectiveness in
preventing "eavesdropping" and "cloning," susceptibility to fraud and
unreliability in data transfer. Digital wireless telecommunications systems,
such as PCS, overcome the capacity constraints of analog systems by converting
voice or data signals into a stream of digits that is compressed before
transmission, enabling a single radio channel to carry multiple and simultaneous
signal transmissions. This increased capacity, along with enhancements in
digital protocols, allows digital-based transfer systems to offer new and
advanced services including greater call privacy, fraud protection, single
number service, integrated voice and paging and enhanced wireless data
transmission services such as E-mail, facsimile and wireless connections to
computer networks.
PCS spectrum differs from traditional cellular in three basic ways:
frequency, spectrum bandwidth and geographic service areas. PCS networks will
operate in a higher-frequency band (1890-1990 MHz) than cellular (800-900 MHz).
PCS licenses will also be comprised of 30 MHz or 10 MHz spectrum versus 25 MHz
spectrum for cellular networks. As a result of improved digital technology and
the large allocation of spectrum, PCS will have more capacity for new wireless
services such as data and video transmission. Finally, PCS is geographically
segmented among 51 regional service areas based upon Rand McNally's Major
Trading Areas ("MTAs") (comprising the A-Block and B-Block) and 493 local
service areas based upon Rand McNally's Basic Trading Areas ("BTAs") (comprising
the C, D, E and F-Blocks) as contrasted with the U.S. Census Bureau's 306
Metropolitan Statistical Areas ("MSAs") and 428 Rural Statistic Areas ("RSAs")
used for cellular licenses. The FCC has limited the amount of commercial mobile
radio service spectrum to which an entity may hold an attributable interest in a
single geographic area to 45 MHz. (See "C. Regulation of the Wireless
Telecommunications Industry -- Commercial Mobile Radio Service Spectrum
Ownership Limit.")
FORMATION OF PCS INDUSTRY THROUGH FCC AUCTIONS
In order to increase competition in wireless communications and promote
the rapid deployment of advanced technologies, Congress enacted legislation
directing the FCC to allocate radio frequency spectrum for PCS by competitive
bidding. In March, 1995, the FCC completed its first auction, the A-Block and
B-Block Auctions, resulting in the award of two licenses for the 30 MHz spectrum
in each of 51 MTAs. Each licensee must construct networks that serve at least
one-third of the population in its markets within five years of the grant of the
applicable license and at least two-thirds of the population within ten years.
The C-Block Auction, comprised of 30 MHz BTA licenses, was
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recently completed and is currently being followed by auctions of the 10 MHz
D-Block, E-Block and F-Block BTA licenses.
When Congress granted authority to the FCC to use auctions to award
licenses for broadband PCS, it directed the FCC to create special provisions for
certain groups which might otherwise lack access to capital. Such groups were
statutorily designated as women and minority-owned businesses, small businesses,
and rural telephone companies. To meet this directive, the FCC reserved a
portion of the broadband PCS spectrum available via auction (C-Block and
F-Block) for such designated entities meeting certain financial criteria. In the
wake of certain litigation, however, the FCC eliminated the race and
gender-based groups or criteria. C-Block represents 30 MHz BTA licenses and
F-Block represents the 10 MHz BTA licenses, with both sets of licenses being
auctioned on a nationwide basis. Together, these two blocks make up the
"Entrepreneurs' Block." The Company participated in the C-Block Auction as a
"Small Business" under the FCC regulations. The FCC has established additional
preferences to assist qualified participants in their efforts to attract capital
necessary to obtain a broadband PCS license at auction and build out their
networks. These preferences include bidding credits and installment payments.
"Small Businesses," meaning entities with not more than an average of $40
million in gross annual revenues over the three calendar years preceding the
entity's short form (Form 175) filing date, receive a 25% bidding credit and can
finance their licenses over ten years with 10% down, paying interest only for
the first six years at a fixed rate equal to the 10-Year U.S. Treasury Note Rate
applicable at the date of grant of the entity's licenses. The Company qualified
and benefited from both of these preferences. The Company's interest rate was
established at 7%.
The FCC established the D, E and F-Blocks as 10 MHz spectrum blocks
that will be licensed on a BTA basis. The FCC commenced auctioning D, E and
F-Blocks on August 26, 1996. As of November 25, 1996, the auction of those
Blocks had yet to be concluded. Tiered bidding credits of 15% and 25% are
available to F-Block Bidders depending upon the size of the applicant.
Installment payment plans for bidders meeting the Small Business definitions in
the F-Block (interest only payments available only during the first two years of
the license term) are less favorable than were made available to Small
Businesses in the C-Block auctions. However, although the auction is not yet
concluded, it may result that the cost per POP/MHz may be less than the
corresponding cost paid in the C-Block auction.
There is no traditional filing fee required. After the initial
applications were filed, the FCC required an upfront payment of a predetermined
amount which was refundable (without interest) in the event the Company was not
the high bidder. This amount for the C-Block was defined as $0.015 per capita
per MHz for each target market identified within the initial application.
Accordingly, the Company, through its PCN subsidiary, deposited $1,000,000 with
the FCC to participate in the auction. The Company bid and was successful in
obtaining its six FCC licenses in the Entrepreneurs' Blocks in the BTA auction.
The Entrepreneurs' Blocks are the PCS frequency blocks designated "C" and "F."
In those blocks, the FCC has reserved spectrum for entrepreneurial businesses
and small businesses. The FCC awards bidding preferences and enhanced
installment payments to small businesses. Under FCC rules, the Company met the
FCC's definition of a "small business," and received a 25% bidding credit with
respect to its bid, and was allowed to pay its winning bid over a 10-year period
with interest only during the first six years at the 10 year Treasury Bill
interest rate. Additionally, all winning bidders were required to make full down
payment within five days after the auction close. The standard down payment was
20% of the net winning bid (inclusive of the up-front payment), although a Small
Business such as the Company was only required to pay 10% for C-Block
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Licenses: 5% at the auction close and the balance after grant of their
applications. The Company complied with this requirement.
PCS TECHNOLOGY
PCS service areas are divided into multiple regions called "cells,"
each of which contains a base station consisting of a low-power transmitter, a
receiver and signaling equipment. The cells are typically configured on a grid
in a honeycomb-like pattern, although terrain factors (including natural and
man-made obstructions) and signal coverage patterns may result in irregularly
shaped cells and overlaps or gaps in coverage. The base station in each cell is
connected to a base station controller and each base station controller is
connected to a switching office by microwave, fiber optic cable, telephone wires
or a hard-wired interface to a switching office. The switching office controls
the operation of the wireless telephone networks for its entire service area,
performing inter-base station hand-offs, managing call delivery to handsets,
allocating calls among the cells within the networks and connecting calls to and
from the local landline telephone system or to a long-distance telephone
carrier. Wireless service providers have interconnection agreements with various
local exchange carriers and long-distance carriers, thereby integrating wireless
telephone networks with landline telecommunications systems. Because two-way
wireless networks are fully interconnected with landline telephone networks and
long-distance networks, subscribers can receive and originate both local and
long-distance calls from their wireless telephones.
The signal strength of a transmission between a handset and a base
station declines as the handset moves away from the base station, so the
switching office and the base stations monitor the signal strength of calls in
progress. In an analog system, when the signal strength of a call declines to a
predetermined level, the switching office may "hand off" the call to another
base station that can establish a stronger signal with the handset. If a handset
leaves the service area of the wireless service provider, the call is
disconnected unless an appropriate technical interface is established to hand
off the call to an adjacent system.
While PCS and cellular networks utilize similar technologies and
hardware, they operate on different frequencies and may utilize various
frequency management technologies, or protocols. There are different radio
air-interface standards established in the United States for the provision of
PCS to multiple users over the allocated spectrum. The primary methods of
digital wireless communications widely accepted by the wireless industry are
based on TDMA or CDMA. These multiple access techniques provide for multiple
communications over the radio channel either by dividing it into distinct time
slots and transmitting user-specific data in each time slot (a method known as
TDMA) or by assigning specific codes to each packet of user data that in
conjunction with many other users' data comprise a signal (a method known as
CDMA). While the FCC has mandated that licensed cellular networks in the U.S.
must utilize compatible analog signaling protocols, the FCC has intentionally
avoided mandating a universal digital signaling protocol for PCS. Three
principal competing, incompatible digital wireless standards have been proposed
by various vendors for use in PCS networks: CDMA, GSM and TDMA. A version of
TDMA developed in Europe, GSM, has the advantage of being the most proven PCS
technology in international markets. TDMA, while currently being offered by
cellular providers in certain U.S. cities, has, in the Company's opinion, often
been associated with poor sound quality and numerous dropped calls. PCS appears
to be intended for adoption by one or more low-tier Systems, including that
proposed for adoption by 21st Century Telesis Joint Venture, which will begin
site construction in Jackson, Mississippi and North Bond, Indiana in the fourth
quarter of 1996; and which may be adopted for Alaska. CDMA is currently
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being used by cellular providers on a limited basis in the U.S. and has been
implemented on a commercial basis in Hong Kong and South Korea. Although CDMA
is not currently widely deployed in the U.S., the Company believes that CDMA
technology will be less costly to deploy and will provide better quality,
greater capacity and more flexibility than either GSM or TDMA. For these
reasons, the Company believes that CDMA will become the most widely adopted PCS
technology. (See, "A. Business of the Company -- Competing PCS Technologies;
Initial Selection of CDMA Technology.")
Because these protocols are incompatible with each other and analog
cellular, a subscriber of networks utilizing GSM technology, for example, will
be unable to use his handset when traveling in an area covered only by a CDMA or
TDMA based network unless he carries a dual-mode/dual-band handset that permits
the subscriber to use the cellular networks in that area. For this reason, the
success of each protocol will depend both on its ability to offer quality
wireless service and on the extent to which its users will be able to use their
handsets when roaming outside their service area. Based on public announcements
by licensees in the A-Block and B-Block Auctions and winning bidders in the
C-Block Auction, the Company believes that CDMA technology will provide coverage
to over 90% of the U.S. population, including virtually all of the top 100
markets in the U.S. The Company believes CDMA networks will offer end-users
significant advantages over other technologies, including increased security
when compared to analog cellular networks, land-line voice quality and fewer
dropped calls when compared to analog and other digital technologies.
Broadband PCS will include small, lightweight multi-function portable
phones, portable facsimile, other imaging devices, new types of multi-channel
cordless phones, and advanced paging devises with two way capabilities. A PCS
network will provide each subscriber with a personal number similar to that
provided under the Company's new FlexTM Paging System. A sender could use any
one of the variety of devices to send information to a personal identifier
rather than a physical location or device. The subscriber would then be alerted
on the device of their choice that there is incoming information, along with a
descriptive summary. The subscriber could then decide which device should handle
this information and route or dispose of it appropriately. Management believes
that as the business population continues to become more decentralized and
mobile, the demand for these types of services will increase. Many manufacturers
have been developing and offering PCS transmission equipment in advance of the
FCC auctions. Accordingly, the Company does not anticipate difficulties in
obtaining PCS transmission equipment upon the build-out and operation of its PCS
system.
In order to facilitate the offering of a diverse range of complex
wireless telecommunications services, the FCC has reserved a total of 120 MHz of
spectrum for PCS licenses. The FCC has sub-divided this bank into six licenses,
in each service area through three 30 MHz blocks and three 10 MHz blocks. The
Company's six FCC licenses are for 30 MHz, which is substantially broader than
the 10 MHz blocks. Auctions currently underway are offering systems in the 10
MHz blocks.
The FCC has allocated these licenses to service areas based on the 1992
Rand McNally Commercial Atlas and Marketing Guide definitions of Major Trading
Areas (MTAs) and BTAs. There are 51 designated MTA markets and 493 designated
BTA Markets. The winning bidders in the MTA auction represent consortiums of the
largest telecommunication companies in the United States. The Company's Areas
represent 6 of the 493 BTA Markets.
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COMPETITION
The wireless industry is characterized by intense competition between
PCS, cellular and other wireless service providers. The Company, both directly
with respect to its own PCS system and as a reseller of MOUs under its resale
agreement with NextWave, will compete with numerous other companies and
technologies, and will compete directly with as many as five other PCS licensees
in each of the Markets. The A-Block and B-Block licensees in the various markets
in which the Company will compete, which include AT&T Wireless Services, Inc.,
Sprint Spectrum L.P. and Omnipoint Corp., have substantially greater financial
resources available than the Company's and enjoy significant time to market
advantage over the Company. In addition, the FCC commenced auctioning the three
remaining PCS license blocks (D-Block, E-Block and F-Block, each of which is 10
MHz in bandwidth), which will likely be concluded by the end of 1996 or early
1997. The Company is eligible to participate in the reauctioning of defaulted
C-Block licenses and in any future auctions of defaulted D, E and F-Block
Licenses, under the current FCC rules. (See "C. Regulation of Wireless
Telecommunications Industry.")
The Company also expects to compete with the specialized mobile radio
("SMR") operator in each of the Markets. The leading national provider of
enhanced SMR (ESMR - see definition above) is NEXTEL Communications Inc. ESMR
systems are capable of delivering dispatch and automatic interconnected mobile
voice services and data telecommunications services. The FCC recently completed
an auction of 1,020 MTA 900 MHz SMR spectrum. SMR operators will be capable of
delivering communications services in conjunction with PCS and cellular
operations.
The Company will also face competition from other wireless service
providers, such as paging companies and mobile satellite systems, including
systems similar to the Company's Paging Network. Although a less direct
substitute for mobile telephone services, one-way and two-way paging services
may be adequate for those with more limited communications needs. The FCC has
initiated the adoption of rules to auction paging licenses. The FCC has also
commenced licensing "narrowband PCS" in the 900 MHz band, which includes, among
other services, data messaging, advanced one-way and two-way paging and
facsimile, such as that utilized in the Company's Paging Network. The messaging
and paging services are expected to include electronic mail, digitized voice
messages, and graphic images. In addition, the FCC has licensed three mobile
satellite systems which plan to offer global cellular-type service from mobile
satellites orbiting the earth. The first mobile satellite launch is expected to
occur in 1997. These services, although competitive with the Company's services,
are targeted to more narrow customer markets in light of both the expected high
price to the customer and the restricted range of services to be offered, as
compared to the services to be offered by the Company.
The FCC recently initiated a rulemaking proceeding in which it expects
to adopt rules governing a new service, called "Wireless Communications
Services" ("WCS"), in the 2305-2320 and 2345-2360 MHz bands. The proposal would
allow WCS licensees to provide a variety of wireless communications services
ranging from mobile PCS-like services to satellite digital audio radio services,
at the discretion of the licensee. Known as spectrum flexibility, the FCC
proposes to allow the licensee to use the spectrum however it sees fit. The FCC
is also considering not imposing minimum build-out requirements so that a
licensee would not have to risk forfeiting its license if certain construction
benchmarks had not been met. Congress has required that the FCC start auctioning
this spectrum in April, 1997.
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C. REGULATION OF THE WIRELESS TELECOMMUNICATIONS INDUSTRY
OVERVIEW
FCC AUTHORITY. The Communications Act of 1934, as amended (the
"Communications Act") grants the FCC the authority to regulate interstate
communications by wire and radio. The scope of the FCC's authority includes (i)
allocating radio frequencies, or spectrum, for specific services, (ii)
establishing qualifications for applicants seeking authority to operate such
services, including PCS applicants and paging licensees, (iii) approving initial
licenses, modifications thereto, license renewals, and the transfer or
assignment of spectrum licensees, (iv) promulgating and enforcing rules and
policies that govern the operation of spectrum licensees, (v) the technical
operation of wireless services, interconnection responsibilities between and
among PCS, other wireless services such as cellular, and landline carriers, and
(vi) imposition of fines and forfeitures for any violations of those rules and
regulations. Under its broad oversight authority with respect to market entry
and the promotion of a competitive marketplace for wireless providers, the FCC
regularly conducts rulemaking and adjudicatory proceedings to determine and
enforce rules and policies potentially affecting broadband PCS operations.
REGULATORY PARITY. The FCC adopted rules designed to create a symmetry
in the manner in which it and the States regulate similar types of mobile
service providers. According to these rules, all "commercial mobile radio
service" ("CMRS") providers that provide substantially similar services are
subject to similar regulation. A CMRS service is a for-profit interconnected
mobile radio service made available to the public. Under those rules, providers
of PCS, SMR and ESMR services are subject to regulations similar to those
governing cellular carriers if they offer an interconnected commercial mobile
service. For example, CMRS providers are not required to file federal tariffs.
Congress specifically authorized the FCC to forbear from applying such
regulations in the Omnibus Budget Reconciliation Act of 1993. With respect to
cellular, the FCC has stated its intent to continue monitoring competition in
the cellular service marketplace. The FCC also concluded that Congress intended
to preempt State and local area rate and entry regulation of all CMRS providers,
including cellular, but established procedures for State governments to petition
the FCC for authority to continue or initiate such regulation.
COMMERCIAL MOBILE RADIO SERVICE SPECTRUM OWNERSHIP LIMIT. The FCC has
limited the amount of CMRS spectrum to which an entity may hold an attributable
interest in a single geographic area to 45 MHz. For these purposes, CMRS and PCS
licenses are "attributed" to an entity where its investments exceed certain
thresholds, or the entity is an officer or director of a CMRS or PCS licensee.
The Company's ability to raise capital from entities with attributable CMRS
interests in certain geographic areas is likely to be limited as a result of
this restriction.
INTERCONNECTION REQUIREMENTS. The FCC has pending proceedings to
address various forms of interconnection obligations which could affect
broadband PCS and other wireless service providers. In its mutual compensation
proceedings, the FCC is examining its policies regarding the compensation
arrangements which apply when CMRS providers, including broadband PCS providers,
interconnect with LECs. In addition, the FCC is considering whether to rely upon
private negotiations between wireless providers to determine whether direct
interconnections between wireless networks should occur. The FCC also is
considering whether private negotiations should be the preferred basis for
wireless providers to permit the customers of one such provider to obtain
service while roaming in the service area of the other.
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In related parts of the foregoing proceedings, the FCC is considering
whether to require all wireless providers to provide capacity to non-facilities
based resellers, whether wireless licensees should be permitted to resell
capacity acquired from other wireless providers in the markets where they hold
licenses (at least during the initial start-up period) and whether wireless
providers should be required to offer unbundled communications capacity to
resellers who intend to operate their own switching facilities.
OTHER FCC REQUIREMENTS. The FCC also has pending proceedings regarding
the scope of permissible uses of broadband PCS networks to provide fixed local
loop and other fixed services in competition with the wireline offerings of the
LECs. It also is considering the possible adoption of requirements to broadband
PCS and other providers of real-time voice services to implement enhanced 911
capabilities.
The Company intends to use common carrier point-to-point microwave and
traditional landline facilities to connect base station sites and to link them
to their respective main switching offices. These microwave facilities are
separately licensed by the FCC on a first-come, first-served basis (although the
FCC has proposed to auction certain such licenses) and are subject to specific
service rules.
Wireless providers also must satisfy a variety of FCC requirements
relating to technical and reporting matters. One such requirement is the
coordination of proposed frequency usage with adjacent wireless users,
permittees and licensees in order to avoid electrical interference between
adjacent networks. In addition, the height and power of base station
transmitting facilities and the type of signals they emit must fall with
specified parameters.
OTHER FEDERAL REGULATIONS. Wireless networks are subject to certain
Federal Aviation Administration and other guidelines regarding the location,
lighting and construction of transmitter towers and antennas. In addition, the
FCC has authority to enforce certain provisions of the National Environmental
Policy Act as they would apply to the Company's facilities.
STATE AND LOCAL REGULATION. The scope of State regulatory authority
covers such matters as the terms and conditions of interconnection between LECs
and wireless carriers under FCC oversight, customer billing information and
practices, billing disputes, other consumer protection matters, certain
facilities construction issues, transfers of control, the bundling of services
and equipment, and requirements relating to making capacity available to third
party carriers on a wholesale basis. In these areas, particularly the terms and
conditions of interconnection between LECs and wireless providers, the FCC and
State regulatory authorities share regulatory responsibilities with respect to
interstate and intrastate issues, respectively.
The FCC and a number of State regulatory authorities have initiated
proceedings or indicated their intention to examine access charge obligations,
mutual compensation arrangements for interconnections between local exchange
carriers and wireless providers, the pricing of transport and switching
facilities provided by LECs to wireless providers, the implementation of "number
portability" rules to permit telephone customers to retain their telephone
numbers when they change service providers, and alterations to the structure of
universal service funding, among other matters.
The Company has retained experienced FCC counsel to monitor regulatory
developments affecting the mobile radio industry. This will continue to be of
significant import to the Company, since proceedings with respect to
telecommunications policy issues before the FCC and State
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regulatory authorities could have a significant impact on the competitive
market structure among wireless providers and the relationships between
wireless providers and other carriers, including the Company.
1996 ACT
On February 8, 1996, Congress enacted the 1996 Act, which effected a
sweeping overhaul of the Communications Act. In particular, the 1996 Act
substantially amended Title II of the Communications Act, which governs
telecommunications common carriers. The policy underlying this legislative
reform was the opening of the telephone exchange service markets to full
competition. The 1996 Act requires incumbent wireline LECs to open their
networks to competition through interconnection and access to unbundled network
elements and prohibits state and local barriers to the provision of interstate
and intrastate telecommunications services.
Implementation of the provisions of the 1996 Act will be the task of
the FCC, the State public utility commissions and a Federal-State joint board.
Much of the implementation of the 1996 Act must be completed in numerous
rulemaking proceedings with short statutory deadlines. These proceedings are
expected to address issues and proposals already before the FCC in pending
rulemaking proceedings affecting the wireless industry as well as additional
areas of telecommunications regulation not previously addressed by the FCC and
the States.
The 1996 Act makes all state and local barriers to competition
unlawful, whether they are direct or indirect. It directs the FCC to initiate
rulemaking proceedings on local competition matters and to preempt all
inconsistent State and local laws and regulations.
The 1996 Act prohibits state and local governments from enforcing any
law, rule or legal requirement that prohibits or has the effect of prohibiting
any person from providing interstate or intrastate telecommunications services.
States retain jurisdiction under the 1996 Act to adopt laws necessary to
preserve universal service, protect public safety and welfare, ensure the
continued quality of telecommunications services and safeguard the rights of
consumers.
Some specific provisions of the 1996 Act which are expected to affect
wireless providers, including the Company, are summarized below. This discussion
is a summary only, and is not intended to be, and does not purport to represent,
a complete discussion of the 1996 Act, or the effects of such provisions.
EXPANDED INTERCONNECTION OBLIGATIONS. The 1996 Act establishes a
general duty of all telecommunications carriers, including C-Block PCS
licensees, to interconnect with other carriers. The 1996 Act also contains a
detailed list of requirements with respect to the interconnection obligations of
LECs. These "interconnect" obligations include resale, number portability,
dialing parity, access to rights-of-way and reciprocal compensation.
LECs designated "incumbents" have additional obligations including: to
negotiate in good faith; to interconnect on terms that are reasonable and
non-discriminatory; to provide non-discriminatory access to facilities,
equipment, features, functions and capabilities; to offer for resale at
wholesale rates any service that LECs provide on a retail basis; and to provide
actual collocation of equipment necessary for interconnection or access.
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The 1996 Act establishes a framework for state commissions to mediate
and arbitrate negotiations between incumbent LECs and carriers requesting
interconnection, services or network elements. The 1996 Act establishes
deadlines, policy guidelines for state commission decision making and federal
preemption in the event a state commission fails to act. On October 15, 1996,
the Eighth Circuit U.S. Court of Appeals suspended implementation of key
requirements set forth by the FCC in its local Interconnection Order in which
the Commission interprets provisions in the 1996 Act for opening up local
telephone markets to competition. The principal issue is whether the FCC can
compel state regulators to use specific pricing methodologies to define what is
a "reasonable" rate for interconnection and other carrier obligations. If it
runs its course, the litigation is expected to last for up to two years, or
longer.
REVIEW OF UNIVERSAL SERVICE REQUIREMENTS. The 1996 Act contemplates
that interstate telecommunications providers, including CMRS providers, will
"make an equitable and non-discriminatory contribution" to support the cost of
providing universal service, although the FCC can grant exemptions in certain
circumstances.
PROHIBITION AGAINST SUBSIDIZED TELEMESSAGING SERVICES. The 1996 Act
prohibits LECs from subsidizing telemessaging services (i.e., voice mail, voice
storage/retrieval, live operator services and related ancillary services) from
its telephone exchange service or exchange access.
CONDITIONS ON RBOC PROVISION OF IN-REGION INTERLATA SERVICES. The 1996
Act generally requires that before engaging in in-region interLATA services, the
RBOCs must provide access and interconnection to one or more unaffiliated
competing providers of telephone exchange service, or after ten months after
enactment of the 1996 Act, establish that no such provider requested such access
and interconnection more than three months before the RBOCs has applied for
authority.
The specific interconnection requirements, which the RBOCs must offer
on a non-discriminatory basis, include interconnection and unbundled access;
access to poles, ducts, conduits, and rights-of-way owned or controlled by the
RBOCs, unbundled local loops, unbundled transport and unbundled switching;
access to emergency 911, directory assistance, operator call completion and
white pages; access to telephone numbers, databases and signalling for call
routing and completion; number portability; local dialing parity; reciprocal
compensation; and resale.
RBOC COMMERCIAL MOBILE JOINT MARKETING. The RBOCs are permitted to
market jointly and sell wireless services in conjunction with telephone exchange
service, exchange access, intraLATA and interLATA telecommunications and
information services.
CMRS FACILITIES SITING. The 1996 Act limits the rights of states and
localities to regulate placement of CMRS facilities, such as antennas, so as to
prohibit the provisions of wireless services or to discriminate among providers
of such services. It also eliminates environmental effects from RF emissions
(provided the wireless system complies with FCC rules) as a basis for states and
localities to regulate the placement, construction or operation of wireless
facilities. The FCC's implementation of these provisions and the scope thereof
have neither been adopted by the agency nor reviewed by the courts.
EQUAL ACCESS. The 1996 Act provides that wireless providers are not
required to provide equal access to common carriers for toll services. The FCC
is authorized to require unblocked access subject to certain conditions.
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DEREGULATION. The FCC is required to forebear from applying any
statutory or regulatory provision that is not necessary to keep
telecommunications rates and terms reasonable or to protect consumers. A state
may not apply a statutory or regulatory provision that the FCC decides to
forebear from applying. In addition, the FCC must review its telecommunications
regulations every two years and change any that are no longer necessary.
GENERAL PCS REGULATIONS
The FCC allocated spectrum for broadband PCS services in June 1994 in
the 1850 to 1990 MHz bands, generally referred to as the "2GHz band." Of the 120
MHz available for PCS services, the FCC created six separate blocks of spectrum
identified as A, B, C, D, E and F-Block. The A-Block, B-Block and C-Block are
each allocated 30 MHz of spectrum and the D-Block, E-Block and F-Block are
allocated 10 MHz each. The FCC adopted a ten-year PCS license term with an
opportunity to renew. The failure to obtain a renewal could substantially erode
the value of the Company's investment in the build-out of its PCS systems.
The FCC adopted a "rebuttable presumption" that all PCS licenses are
common carriers, subject to Title II of the Communications Act. Accordingly,
each PCS license deemed to be a common carrier must provide services upon
reasonable request and the rates, terms and conditions of service must not be
unjustly or unreasonably discriminatory.
STRUCTURE OF PCS BLOCK ALLOCATIONS. The FCC defines the geographic
contours of the licenses within each PCS block based on the MTAs and BTAs
developed by Rand McNally. The FCC awarded A-Block and B-Block licenses in 51
MTAs. The C-Block, D-Block, E-Block and F-Block spectrum were allocated on the
basis of 493 smaller BTAs.
All but three of the 102 total A-Block licenses and all B-Block
licenses were auctioned in 1995. Three A-Block licenses were awarded separately
pursuant to the FCC's "pioneer's preference" program. The auctioned A-Block and
B-Block licenses were awarded in June 1995. The C-Block and F-Block spectrums
are reserved for Entrepreneurs. (See "Entrepreneurs' Block.") C-Block licenses
have been auctioned by the FCC, although some BTAs are subject to reauction
because several auction winners defaulted. The "D", "E" and F-Block Auctions are
being conducted at this time.
THE ENTREPRENEURS' BLOCK
ELIGIBILITY REQUIREMENTS. As noted above, the FCC designated frequency
blocks C and F as "Entrepreneurs' Blocks." The Company's subsidiary, PCN, was
named as a winning bidder for certain licenses in the C-Block. The FCC requires
that all C-Block licensees not exceed certain maximum size requirements as
measured by gross revenues and total assets. In order to acquire C-Block
licenses, the applicant, together with its affiliates and persons or entities
that hold interests in the applicant and their affiliates, must have gross
revenues of less than $125 million in each of the last two years and total
assets of less than $500 million at the time the applicant's Short-Form (FCC
Form 175) is filed.
Under the FCC's rules, the Company also qualifies as a "Small
Business," that is, an entity that, together with its affiliates and persons or
entities that hold interests in the applicant and their affiliates, has average
gross annual revenues of not more than $40 million for the preceding three
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calendar years prior to the date that the Short Form initial application to bid
is filed. As a result of its classification as a Small Business, the Company
qualified for both a 25 percent bidding credit and favorable financing terms,
i.e., for installment payments of interest only for the first six years of the
license, and payments of interest and principal amortized over the remaining
four years of the license term.
The FCC allows exceptions to the general rule regarding limitations on
gross revenues and assets by not counting the revenues and assets of certain
non-controlling investors. One such exception applies to companies meeting the
definition of a "Publicly Traded Corporation with Widely Dispersed Voting
Power." To qualify, the company must be organized in the United States; its
shares, debt or other ownership interests must be traded on an organized
exchange within the United States; no person can own more than 15% of the equity
or possesses the power to control the election of more than 15% of the board of
directors; and no person, other than management or members of the board of
directors in their capacity as such, can have control, in fact. The parent
Company of the entities holding the PCS licenses filed under this exception. If
the Company should no longer meet the definition of a Publicly Traded Company
with Widely Dispersed Stock, the Company would nevertheless seek to maintain its
eligibility as a small business. For example, the FCC adopted structural options
in its rules for C-Block applicants that are controlled by investors meeting
certain financial criteria through a "Control Group." The control group must
have de facto and de jure control of the applicant licensee. For purposes of
determining eligibility of an applicant (or licensee) using a Control Group
structure, the FCC counts the gross revenues and total assets of the applicant
(or licensee), its affiliates, the members of the control group, and their
affiliates. The FCC does not count the gross revenues and total assets of
"nonattributable equity investors" -- that is, investors outside the control
group that satisfy the FCC's rules and do not control more than 25% of the
Company's total equity (whether through voting or non-voting stock, or both) --
or of their outside affiliates.
Thus, for example, the Company could be structured pursuant to the
FCC's "25 Percent Equity Structural Option." Pursuant to 25 Percent Equity
Structural Option, the applicant must have a control group that owns at least 25
percent of the applicant's (or licensee's) total equity and at least 50.1
percent of the applicant's (or licensee's) total voting stock, on a fully
diluted basis.
PCS AUCTIONS. The FCC initiated auctions for the C-Block in December
1995. The Company participated in the auctions and filed applications for all
BTA licenses it won in those auctions. The Company's strategy in the auction
process was designed to further its business plan described elsewhere in this
Prospectus, and to acquire licenses in contiguous markets in the Northeastern
U.S. The FCC granted the Company's six licenses on October 2, 1996, subject to
full and timely payment of the installment payments on the winning bids. The
Company has executed and delivered Installment Payment Plan Notes and Security
Agreements for each granted license with the FCC as the payee and secured party.
LICENSE TRANSFER RESTRICTIONS. The FCC has also promulgated regulations
restricting transfer of C-Block licenses. Most notably, transfer of C-Block
licenses is not permitted within the first five years of grant of the license
unless the transfer is to another entity eligible to be a C-Block licensee, such
as another Small Business. After five years, licenses are freely transferable
providing FCC approval prior to the transfer has been obtained. All transfers
during the first ten-year license term are subject to unjust enrichment
penalties discussed below.
In addition, the FCC is considering whether to allow PCS licenses to
"partition" their licensed geographic areas and to permit "spectrum
disaggregation" in their frequency blocks. Partitioning and
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disaggregation would allow licenses to spin off discrete portions of their
licensed areas and/or frequencies to third parties.
UNJUST ENRICHMENT. Any transfer during the full license term (10 years)
may require certain costs and reimbursements to the government of bidding
credits and/or outstanding principal and interest payments. In addition, if the
Company wishes to make any change in ownership structure during the initial
license term involving the de facto and de jure control of the Company, it must
seek FCC approval and may be subject to the same costs and reimbursement
conditions indicated above.
BUILD-OUT REQUIREMENTS. The FCC has mandated that recipients of PCS
licenses adhere to five year and ten year build-out requirements. Violations of
these regulations could result in license revocations, forfeitures or fines.
Under the build-out requirements, all 30 MHz PCS licenses (such as C-Block
licenses) must construct facilities that offer coverage to at least one-third of
the population in their service area within five years from the date of initial
license grants. Service must be provided to two-thirds of the population within
ten years. Licenses which fail to meet the coverage requirements may be subject
to forfeiting the license.
ADDITIONAL REQUIREMENTS. As a C-Block licensee, the Company will be
subject to certain restrictions that limit, among other things, the number of
licenses it may hold as well as certain cross-ownership restrictions pertaining
to cellular and other wireless investments.
FOREIGN OWNERSHIP RESTRICTIONS. The Communications Act requires that
non-U.S. citizens, their representatives, foreign governments, or corporations
otherwise subject to domination and control by non-U.S. citizens may not own of
record or vote (i) more than 20 % of the capital stock of a common carrier
directly, or (ii) without approval of the FCC, more than 25% of the capital
stock of the parent corporation of a common carrier license. Because the FCC
classifies PCS as a common carrier offering, PCS licenses are subject to the
foreign ownership limits. Congress recently eliminated restrictions on non-U.S.
citizens serving as members on the board of directors of a common carrier radio
licensee or its parent. The FCC also recently adopted rules that, subject to a
public interest finding by the FCC, could allow additional indirect foreign
ownership of CMRS companies to the extent that the relevant foreign states
extend reciprocal treatment to U.S. investors.
Failure to comply with these regulations may result in the FCC ordering
(i) divestiture of the non-U.S. parties to bring the entity within compliance of
the Communications Act, (ii) issuance of fines, or (iii) denial of renewal or
revocation of the license(s).
PENALTIES FOR PAYMENT DEFAULT. A C-Block licensee that fails to make
timely quarterly installment payments may incur substantial financial penalties,
license revocation or other enforcement measures at the FCC's discretion. Where
a C-Block applicant anticipates defaulting on any required payment, it may
request a three to six month grace period before the FCC cancels its license. In
the event of default by a C-Block licensee, the FCC is empowered to reclaim the
licenses, reauction them, and subject the defaulting party to a penalty
comprised of the difference between the price at which it acquired its license
and the amount of the winning bid at reauction, plus an additional penalty of
three percent of the subsequent winning bid, or the defaulting high bid,
whichever is lower.
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RELOCATION OF INCUMBENT FIXED MICROWAVE LICENSEES
In an effort to balance the competing interests of 2GHz microwave
incumbents and newly authorized PCS licensees in that spectrum band, the FCC has
adopted (i) a transition plan to relocate fixed microwave operators that
currently are operating in the 2GHz band, and (ii) a cost sharing plan so that
if the relocation of an incumbent benefits from more than one PCS licensee, the
benefiting PCS licensees will help defray the costs of the relocation. PCS
licensees will only be required to relocate fixed microwave incumbents if they
cannot share the same spectrum. The transition and cost sharing plans expire on
April 4, 2005, at which time remaining incumbents in the PCS spectrum will be
responsible for their costs to relocate to alternate spectrum locations.
Relocation generally involves a PCS operator compensating an incumbent
for costs associated with system modifications and new equipment required to
move to alternate, readily available spectrum. This transition plan allows most
microwave users to operate in the PCS spectrum for a two-year voluntary
negotiation period and an additional one-year mandatory negotiation period. For
public safety entities dedicating a majority of their system communications for
police, fire, or emergency medical service operations, the voluntary negotiation
period is three years. The FCC currently is considering whether to shorten the
voluntary negotiation period by one year. Parties unable to reach agreement
within these time periods may refer the matter to the FCC for resolution, but
the existing microwave user is permitted to continue its operations until final
FCC resolution of the matter.
The FCC's cost-sharing plan allows PCS licensees that relocate fixed
microwave links outside of their license areas to receive reimbursements from
later-entrant PCS licensees that benefit from the clearing of their spectrum.
Recently, the FCC designated two non-profit associations to serve as
clearinghouses to administer the cost-sharing plan.
CELLULAR AND PAGING
In the cellular telephone industry, service is provided within a
Cellular Geographic Service Area (CGSA). Regulations adopted in 1981 provide for
licensing of two cellular telephone system operators for each CGSA throughout
the United States, one to be operated by a wireline carrier and one to be
operated by an independent company other than a wireline carrier. For example,
in the CGSA that covers the New York/New Jersey Metropolitan Area, the wireline
carrier is BANMC, and the non-wireline carrier is AT&T.
The FCC and State Public Utility Commission ("PUCs") jointly regulate
cellular telephone operators, although the FCC's regulatory authority is far
more extensive. Cellular agents are not regulated by the FCC or by PUCs.
However, there can be no assurance that the Company's cellular agent business
will not be subject to regulation in the future. In addition, under their
authority to regulate cellular operators, certain states require that cellular
telephones installed in vehicles be capable of hands-free operation. Such laws
could adversely affect the demand for some of the Company's products and
services.
As a paging system operator, the Company is also regulated by the FCC
under the Communications Act. The FCC grants both exclusive and non-exclusive
licenses to transmit on certain frequencies in specified geographic areas. Radio
Common Carrier ("RCC") licenses are generally exclusive, while Private Carrier
Paging ("PCP") license are generally non-exclusive, i.e. shared among ten or
more licensees. The Company holds PCP licenses.
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The Company, through subsidiaries, has developed a common-channel
regional PCP 900 MHz system for the New York/New Jersey Metropolitan Area. The
Company holds FCC 900 MHz paging licenses on two channels. The FCC required the
Company to place its system in operation within eight months after being granted
licenses, and the Company has complied with this requirement.
The FCC regulates mobile radio service under its public interest
mandate expressed in the Communications Act of 1934, as amended. Among is
principal regulatory duties in the mobile radio area is the allocation of
spectrum for various kinds of services such as SMR/ESMR, PCS, PCP, common
carrier paging, and conventional two-way mobile. The FCC has the exclusive
authority to decide whether non-governmental applicants for radio licenses are
basically qualified to hold licenses to utilize that spectrum. Thus the
Commission issues authorizations for the construction and operation of one-way
and two-mobile systems, and renews licenses for these facilities. Additionally,
whenever entities holding radio authorizations want to effect major changes in
ownership and control, the prior consent of the FCC must be obtained.
During the past several years, Congress and the FCC have made major
modifications to the regulations governing the provision of mobile radio
service. In 1993, for example, Congress amended the Communications Act and, with
respect to mobile radio service providers, sought to achieve regulatory
symmetry. Thus, certain PCP operations were viewed as the "functional
equivalents" of common carrier mobile radio services (such as cellular, common
carrier paging, and PCS) and were reclassified as Commercial Mobile Radio
Service ("CMRS"). The amendments preempted state and local rate and entry
regulations of all CMRS providers and relieved CMRS providers from all FCC rate
regulation and tariff filing requirements. Congress also eased the Act's alien
ownership restrictions, but made them applicable to all providers of common
carrier services.
Consistent with its licensing functions, the FCC prescribes technical
and operational standards for radio systems in order to minimize harmful
interference to communications and otherwise to ensure efficient operation. In
the early 1990s, the FCC amended its rules relating to 900 MHz channels for
assignment to certain PCPs who met defined eligibility standards. As licensees,
these PCPs gained exclusive use of their channels for the provisions of local,
regional and nationwide one-way paging operations.
Because the Company's PCS service is classified as CMRS, the Company is
subject to the Commission's rules, regulations, and policies governing common
carriers. However, as noted, the Company's communications operations are
generally immune from State and local regulation, although States may seek FCC
rate oversight authority.
In addition to its paging interests, the Company operates two-way UHF
mobile radio dispatch systems in Northern New Jersey. These systems serve
business users such as delivery services, florists, contractors, landscapers and
other enterprises that rely on mobile radio to communicate with fleets or
individual vehicles.
FCC regulations and policies are constantly evolving and are thus
subject to significant and unexpected changes. Effective August 1, 1996, for
example, the FCC halted the issuance of authorizations to establish new paging
systems and authorizations sought by CMRS providers to expand existing
operations. This "freeze," evidencing a policy change, is likely to continue
until the FCC adopts paging spectrum auction rules. The FCC has also deferred,
and may well abandon, a proposal to permit paging companies to recapture
underutilized or dormant CMRS spectrum licenses to others. In short, the Company
is unable to predict either the nature and extent of future FCC rule
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and policy changes or the effect of such changes on its present and planned
communications operations. Nor can it predict whether States might someday
regain any of their prior regulatory powers over mobile radio common carriers
or whether States and local jurisdictions may expand the limited regulatory
authority which has not been preempted by the FCC.
ITEM 2. PROPERTIES
The Company occupies a one level 14,000 square foot facility, with an
additional 4,000 square feet of expansion space at 10 Plog Road, Fairfield, New
Jersey. This building houses the Company's executive offices and warehouse.
Management believes that the facility is well suited for the Company's
operations and has enough space to accommodate the Company's anticipated growth.
The Company has a five (5) year lease for this property, the current monthly
lease payments for this property is $9,240.63. The lease term expires May 31,
2001.
The Company intends to lease sites for its paging transmitters on
commercial broadcast towers, buildings and other fixed sites. The Company
currently leases three sites for its two-way radio transmitters; each site costs
the Company $500 per month. The Company has a fourth transmitter site located on
the United Nations Building. The Company does not pay rent for this site, but
provides services to the United Nations security department in lieu of rent.
Based on management's preliminary research the Company does not anticipate any
difficulty in locating facilities in its Service Area that will be suitable and
adequate for its purposes. although there can be no assurance that this will be
the case.
ITEM 3. LEGAL PROCEEDINGS
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, as Defendants, case number 96 Civ.
1565, pending in the United States District Court for the 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, and treble damages of more than $16,000,000. 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 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 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 believes was
coerced by Audiovox, has 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 lack of
supplemental jurisdiction, which could then be prosecuted in the State Courts.
On August 12, 1996 the Court ruled in favor of the motion of defendants, Toshiba
and AudioVox, and the cause was dismissed on such date. The Company appealed the
Court's ruling, filing its Brief on Appeal on February 21, 1997. On March 12,
1997, Toshiba and AudioVox served their responsive
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brief, and oral argument before the United States Court of Appeals for the
Second Circuit is anticipated to occur on or about April 1, 1997.
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, claims 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, resulting in the imposition of a
"short rate." As a result, Plaintiff claims damages aggregating $156,284.87. The
Company believes it has an excellent working relationship with The Daily News,
and that this suit resulted from a misunderstanding between the respective
principals of the parties, which remained unclarified due to the illness of an
officer of the Company. Counsel for the Company and The Daily News have
conferred, and have stipulated to extend the Company's time to answer or move
with respect to the Complaint, so that the principals may confer. It is believed
an arrangement will be consummated shortly, disposing of this matter. (For a
discussion of potential claims against BANMC, see discussion under caption
"Solicitations For Mobile Cellular Telephone Activations.")
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITYHOLDERS
On July 23, 1996 the Board of Directors of the Company at a Special
Meeting of the Board of Directors authorized the issuance of an aggregate of
4,000,000 Series B Preferred Shares of the Company to Brenda Taylor (1,000,000)
and Messrs. Taylor (1,000,000), Winder (1,000,000) and DePalo (1,000,000) in
return for their personal guarantees of approximately $3,000,000 of the
Company's Subordinated Convertible Debentures. Each share of the Series B
Preferred Stock is valued at $1.50 per share and convertible into 1.50 shares of
Common Stock. The Series B Preferred Shares are payable by a three year
Promissory Note bearing interest at the rate of 7% per annum, with interest
accruing, but not payable until the securities are sold. The Promissory Notes
are immediately extended for additional one-year terms. The Series B Preferred
Shares are fully paid and non-assessable. The Promissory Notes are non-recourse,
but are collateralized by a Pledge of the Stock.
These Series B Preferred Shares are subject to a three (3) year vesting
period pursuant to which 1/3 of the shares will vest immediately, and
thereafter, on July 23, 1997, if Brenda Taylor and Messrs. Taylor, Winder and
DePalo are still employed by, or a director of, the Company at such time, an
additional one-third shall vest, and thereafter on July 23, 1998, if the
aforementioned individuals are still employed by, or a director of, the Company
at such time, the balance shall vest. On July 23, 1996, the Company reserved
6,000,000 common shares for issuance upon the conversion of these Series B
Preferred Shares.
On November 7, 1996, at the Annual Meeting of Shareholders,
stockholders of record on October 11, 1996, voting in person and by proxy, voted
to approve "Proposal No. 3" described in the Company's Notice of Annual Meeting
and Proxy Statement, dated October 17, 1996, which ratified this action by the
Board of Directors. 1,673,222 votes were cast in favor of this Proposal and
425,496 votes were cast against this Proposal.
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The other two matters voted on at this annual meeting of shareholders
was "Proposal No. 1" with respect to the election of directors, pursuant to
which, of the 11,915,515 votes entitled to be cast at the meeting, the number of
votes listed next to the name of each director was cast in favor of his or her
election:
Taylor 9,281,256 DePalo 9,280,956
Winder 9,279,256 Gurian 9,281,256
B. Taylor 9,279,256 Tabankin 9,281,256
In addition, "Proposal No. 2," relating to the approval of the selection
of accountants for fiscal year 1997 was approved by 9,295,456 votes for such
ratification and 54,266 votes against.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS.
Prior to May 12, 1995, the Company's Common Stock was traded
over-the-counter on the National Association of Securities Dealers, Inc.
Automated Quotation ("NASDAQ") Stock Market's Electronic Bulletin Board (the
"OTC Bulletin Board").
The Common Stock and A Warrants are currently traded in the NASDAQ
Stock Market's SmallCap Stock Market (the "NASDAQ SmallCap Market") under the
respective symbols "ELCC" and "ELCCW" and on the Boston Stock Exchange, under
the respective symbols "ELCC" and "ELCCW".
The following table sets forth the range of high and low bid quotations
of the Common Stock and A Warrants, as reported on the OTC Bulletin Board or the
NASDAQ SmallCap Market, for the periods indicated, as adjusted to reflect the 1
for 5 reverse stock split in the second quarter of 1995. These quotations
represent inter-dealer quotations, do not include retail mark-ups, mark-downs or
commissions, and do not necessarily represent actual transactions
COMMON STOCK A WARRANTS
------------ ----------
1995 LOW HIGH LOW HIGH
- ----
First Quarter......................... $2.00 $4.25 N/A N/A
Second Quarter (through May 12, 1995)
$0.75 $4.75 N/A N/A
Second Quarter (beginning May 15,1995) $4.75 $5.50 $1.25 $1.375
Third Quarter......................... $4.75 $6.16 $1.12 $1.81
Fourth Quarter........................ $2.00 $4.75 $.50 $1.1875
1996
- ----
First Quarter......................... $1.875 $2.375 $.375 $.6875
Second Quarter........................ $1.50 $2.593 $.375 $1.156
Third Quarter......................... $.50 $1.56 $.375 $.625
Fourth Quarter........................ $1.281 $2.25 $.531 $1.062
On March 21, 1997, the closing bid prices of the Common Stock and A
Warrants as reported on the NASDAQ SmallCap Market were $1.375 and
$.625, respectively. On March 21, 1997, there were 459 record holders
of the Common Stock and 38 record holders of the Class A Warrants. The
Company believes that there are in excess of 1000 beneficial holders of
the Common Stock and A Warrants.
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There have been no dividends on the Common Stock during the past two
fiscal years, and none1 are expected to be paid during fiscal 1997, or in the
foreseeable future, during which period the Company's available cash is
anticipated to be used to build out its PCS system, enhance its paging
infrastructure, and for marketing and promotion of its wireless services.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto.
RESULTS OF OPERATIONS
YEAR ENDED ON DECEMBER 31, 1996 COMPARED TO YEAR ENDED ON DECEMBER 31, 1995
Revenues decreased approximately $1,379,078 or approximately 15.8% in
1996 compared to 1995. Electronic equipment sales decreased $1,965,846 or 39.8%.
Activation commissions decreased $344,238 or 12.1%. The Company attributes these
decreases to the redirection of its operations and business away from acting
principally as a distributor of consumer, home and office electronics products,
to operating as a multi-faceted wireless telecommunications company. Due to the
change in its operating focus, the Company, for the first time, had revenues
from Paging and Two Way Radio of $984,851 in 1996. Cost of Paging and Two Way
Radio sales was $445,808 in 1996.
Cost of electronics equipment sales decreased $1,472,895 during 1996
compared to 1995. This decrease is attributed to the Company changing its
operations. The gross profit margin however, decreased 8.8% from 11.6% in 1995
to 2.8% in 1996. The decrease of gross profit was due to the fact that the
Company liquidated all of its electronic equipment, with the exception of
cellular telephones.
Cost activations decreased due to a decrease in sales in 1996 compared
to 1995. The gross profit margin increased from 15.7% in 1995 to 16% in 1996.
The higher gross profit margin is due to increased residuals paid by NYNEX and
Bell Atlantic.
Selling, general and administrative ("SGA") expenses increased
approximately $4,556,111 in 1996 compared to 1995. The Company attributes this
increase directly to the needs of the Company's transition into the wireless
telecommunications industry. SGA as a percentage of sales increased from 23.6%
to 90% due to an increase in administrative personnel to meet the Company's
expansion and growth as a multifaceted wireless telecommunications Company and
higher executive officer salaries, a one time charge of $1,437,500 pursuant to a
financial public relations contract the Company entered into on September 4,
1996 and a one time charge of approximately $493,000 related to a bad debt.
Interest expenses increased approximately $120,633 in 1996 compared to 1995 due
to additional borrowings of the Company.
The Company had an operating loss before interest, amortization and
income taxes and other expenses of $5,456,689, in 1996 compared to operating
loss of $1,967,823 in 1995. Net loss in 1996 after interest ($188,860) and a
non-cash expense of ($73,769) as a result of a settlement of potential
litigation, was $5,664,054 compared to net loss of $2,268,959 in 1995. These
losses resulted primarily from expenditures associated with the development and
marketing of the Company's paging and two-way radio systems, and the Company's
move to more suitable premises.
38
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The operations of the Company's subsidiaries since inception in 1991 to
date have been funded principally from cash flow from operations, capital
investments and loans from officers, directors, principal stockholders and third
parties. Although the officers and directors of the Company have provided the
financial accommodations to the Company in the past, there can be no assurance
that they will continue to do so in the future. In addition, the Company has a
$100,000 revolving line of credit with a bank. This loan is personally
guaranteed by the Company's President, cross corporate guaranteed by Free Trade
Distributors, Inc. and secured by the Company's inventory. As of December 31,
1996, there was an outstanding balance under this loan of $95,000 with interest
payable monthly at the rate of 1.5% per annum in excess of the bank's
fluctuating prime lending rate. As of December 31, 1996, the interest rate was
10.5%. This loan became due and payable on April 18, 1996. On June 17, 1996 the
bank extended the due date until April 17, 1997.
As of December 31, 1995 the Company has loaned $550,000 to Threshold
Communications, Inc. ("TCI"). TCI is a corporation engaged in the radio paging
business. TCI has acquired a paging subscriber base, associated paging hardware
and a paging carrier agreement with Skytel, a company that provides nationwide
paging, voice messaging and related messaging services to subscribers and
others. In addition, TCI owns a 900 megahertz FCC paging license in the Paging
Service Area and holds a long-term lease for a paging transmission site. A
principal stockholder of TCI is a stockholder of the Company.
On March 22, 1996 TCI acquired all of the assets and assumed certain
liabilities of General Communications and Electronics, Inc. ("GCE"). In
connection therewith, the Company advanced an additional $175,000 to TCI and
guaranteed certain obligations of TCI in the amount of $739,000. As a result of
the transaction with GCE, TCI, in addition to a paging transmission site which
it previously owned, became a paging reseller. TCI offers paging service
primarily through various paging carriers in the New York metropolitan area. TCI
offers national paging service through a sales and distribution agreement with
Skytel. Under this agreement, TCI pursues regional and national accounts through
its present dealer network in the Paging Service Area. As of the date hereof TCI
has approximately a 9000 person subscriber base. TCI also has the necessary
infrastructure to operate a paging operation, including but not limited to a
full service technical shop and repair facility, engineering capability,
marketing and sales force, billing and collection systems and ancillary product
support capability for paging related products. The Company is currently
negotiating the acquisition of TCI, however, there can be no assurance that the
Company will be able to reach an agreement with TCI. If the Company does acquire
TCI, it will utilize TCI's infrastructure in the operations of its own paging
system. In connection with TCI's acquisition of GCE, the Company issued a
$350,000 non-interest bearing note payable to a corporation owned by a
shareholder of the Company. The balance of this loan was $265,121 at December
31, 1996.
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 worth of
its Common Stock (194,500 shares of the Company's Common Stock at $2.00 per
share).
On January 16, 1996 the Company consummated a Private Placement of
69,460 shares of its Common Stock $.05 par value at a price of $2.25 per share.
The total offering resulted in gross proceeds of $156,217.50. Each subscriber,
in addition to the shares received demand registrations rights which require the
Company to file a Registration Statement upon request of 25% or more of
39
<PAGE>
the shares sold in the offering at anytime during the 18 month period
commencing 30 days from the closing date.
On February 29, 1996, the Company borrowed $134,000 from another
unrelated corporation. Interest is payable to a rate of 10% in monthly
installments of $1,117 per month. The loan becomes due on February 28, 1997. As
additional consideration, the Company issued to the corporation 800,000 A
Warrants with 90 day registration rights and "piggy back" registration rights.
The balance of this loan was $109,711 as of December 31, 1996.
At approximately the same time, the Company also experienced a cash
shortfall and was unable to post the required deposit to be entitled to bid at
the FCC auction. To assist the Company in obtaining financing to facilitate its
bid, William S. Taylor, Les Winder, Brenda Taylor and Robert DePalo guaranteed
loans by the Company in the sum of approximately $1,150,000 and posted certain
cash collateral. In consideration for this loan and guarantee accommodation, and
the posting of cash collateral, the board of directors authorized the purchase
of 24 shares by such persons (six (6) shares each) of Personal Communications
Network, Inc. ("PCN") sole class of authorized and issued common stock and the
grant of 2,300,000 A Warrants. The purchase of the PCN stock and delivery of the
A Warrants were subject to certain conditions relating to the grant of the PCS
Licenses, and delivery of the FCC notes (the "FCC Notes") and related security
agreements by the Company. Closing of these transactions is anticipated to occur
in April, 1997.
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
offered $6,000,000 principal amount of the Company's Subordinated Convertible
Debentures (the "Debentures"). The Company sold an aggregate of $2,990,000 of
the Debentures in two tranches, at which time the Company and the Placement
Agent mutually agreed to terminate the offering. The principal amount of the
Debentures was convertible into shares of the Company's Common Stock at the
option of the holder, 41 days after issuance, at a price equivalent to 25%
discount from the average high closing bid price for five days prior to the
conversion or $1.50, whichever is less. The Debenture bears interest at the rate
of 5% per annum payable on April 1 of each year commencing April 1, 1997. The
Debentures are redeemable and callable for conversion under certain
circumstances. The Company paid to the Placement Agent a placement fee equal to
10% of the gross proceeds, a 2% non-accountable expense allowance and 200,000
Warrants to purchase the Company's common stock at $2.25 per share. The Company
used the proceeds of this offering to increase its deposit in the PCS auction,
to build out its paging system and for general working capital purposes. All
$2,990,000 principal amount of the Debentures has been converted into an
aggregate of 5,706,822 shares of the Company's Common Stock.
On May 8, 1996, the Company won six PCS Licenses. The total winning
bids amounted to $26,452,200, after the 25% discount provided to small business
which the Company qualifies for, under the terms of the auction. The Company has
deposited $2,645,220 with the FCC which equals 10% of the cost of the licenses.
On September 17, 1996, the FCC officially awarded the six PCS Licenses
to the Company. In connection therewith, the Company entered into six separate
Installment Payment Plan Notes ("Plan Notes") with the FCC in the aggregate
amount of $23,807,010. Interest only is due commencing December 31, 1996, with
the first payment of $479,400.84 and subsequent payments in equal consecutive
quarterly installments of $416,622.16 ($1,666,488.64 annually) until September
30, 2002. The interest payment due December 31, 1996 has not been paid. A
default under this note shall occur if the maker remains delinquent for more
than 90 days. Commencing December 31, 2002, the
40
<PAGE>
Company shall pay principal and interest in equal installments of $1,718,853.88
($6,875,415.52 annually) until September 30, 2006 (the "Maturity Date"). The
entire unpaid principal amount, together with accrued and unpaid interest on
the Plan Notes and all remaining obligations thereunder, shall be due and
payable on the Maturity Date.
On September 20, 1996, the Company entered into a loan agreement with
the Marrotta Group ("Marrotta"), pursuant to which the Company borrowed
$500,000. This loan, which was obtained to provide the Company with the ability
to meet its additional shortfalls on a further deposit with the FCC, was
arranged by Robert DePalo, a director, pursuant to a personal and business
relationship with the Marrotta Group, and one or more of its principal
shareholders. The loan bears interest at the rate of 10% per annum, and becomes
due and payable on or before June 20, 1997; however, the Company may request an
automatic three (3) month extension on the due date. As additional consideration
for making the loan, the Company agreed to issue to Marrotta 200,000 shares of
the Company's Common Stock, and 400,000 A Warrants, with demand and piggyback
registration rights.
On October 9, 1996, the Company entered into a loan with Robert DePalo,
a director of the Company, pursuant to which the Company borrowed $180,000. This
loan bears interest at the rate of 10% per annum. The loan is due upon three
days written demand. The Company used the proceeds of this loan for general
corporate purposes.
On October 21, 1996 the Company entered into a loan agreement with
Strategic Marketing Int'l Inc. ("Strategic"), pursuant to which the Company
borrowed $200,000. This loan bears interest at the rate of 10% per annum, and
becomes due and payable on October 21, 1997. As additional consideration for
making the loan, the Company agreed to issue to Strategic 80,000 shares of the
Company's Common Stock and 160,000 A Warrants, with demand and piggy back
registration rights. The Company used the proceeds of the loan for general
corporate purposes.
On May 22, 1996 the Company sold an aggregate of 500,000 shares of its
Common Stock for $625,000 or $1.25 per share to three unrelated parties. On May
22, 1996 the Company's Common Stock was trading at $2.00, the Company sold the
stock at a discount to market due to the fact the stock was restricted, and the
large quantity of shares made the stock relatively illiquid in comparison to the
Company's average daily volume prior to May 22, 1996. The Company received net
proceeds from this sale of $543,750. The Company utilized the proceeds generated
by this issuance of stock for general working capital purposes.
In December, 1996 the Company offered for sale a maximum of 2,200,000,
and a minimum 700,000 units (the "Units"), at a price of $1.50 per Unit. Each
Unit consists of one share of the Company's Common Stock, and one and one-half
(1.5) A Warrants, entitling the purchaser, as holder of each A Warrant to
purchase one share of Common Stock, at $5.00 per share, at any time prior to May
12, 1999, subject to prior redemption by the Company.
The Company will offer and sell the Units through selling arrangements
between the Company and participating registered NASD Broker-Dealers and, where
permitted by law, through offeree representatives and others, in connection with
sales of Units solicited by them (collectively, the "Placement Agents"). The
Placement Agents will receive in the aggregate a selling commission of up to ten
(10%) percent of the aggregate amount of the Unit offering, plus a 1%
non-accountable due diligence allowance, and an outright grant of 750,000 A
Warrants (assuming the maximum offering is achieved featuring the same terms as
the A Warrants included in the Units), which shall be allocated
41
<PAGE>
and distributed to the Placement Agents pro rata, based on the number and
percentage of Units placed by such Placement Agent(s), and the aggregate amount
of sale proceeds generated.
On December 31, 1996, the Company had working capital deficit of
approximately $3,956,977, as compared to a working capital deficit of
approximately $1,724,852 at December 31, 1995. This decrease in the Company's
working capital was primarily due to the Company's redirection in its operations
and business away from acting as a distributor of electronics products, and due
to large expenditures associated with the development and marketing of the
Company's paging and two-way radio systems.
The Company's financial statements for the year ended December 31, 1996
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. Management recognizes that the Company must generate additional
resources or consider modifying operations to enable it to continue operations
with available resources. Management's plans include consideration of the sale
of additional equity securities under appropriate market conditions, alliances
with entities interested in and resources to support the Company's operation or
other business transactions which would generate sufficient resources to assume
continuation of the Company's operations.
The Company has retained investment banking counsel to advise it on the
possible sale of equity securities as well as to introduce and assist in the
evaluation of potential merger and partnering opportunities. The Company also
has retained independent consultants to assist it to identify other entities
interested in its business. Management expects that these efforts will result in
the introduction of other parties with interests and resources which may be
compatible with that of the Company. However, no assurances can be given that
the Company will be successful in raising additional capital or entering into a
business alliance. Further, there can be no assurance, assuming the Company
raises additional funds or enters into a business alliance, that the Company
will achieve profitability or positive cash flow. If the Company is unable to
obtain adequate additional financing or enter into such business alliance,
management will be required to sharply curtail the Company's operations.
IMPACT OF INFLATION
The Company is subject to normal inflationary trends and anticipates
that any increased costs would be passed on to its customers.
42
<PAGE>
Item 7. Financial Statements and Supplementary Data.
The Company has filed and has pending before the Securities and
Exchange Commission (the "SEC") a registration statement on Form S-3, having
filed four pre-effective amendments to its original filing. Special securities
counsel for the Company, Sommer and Schneider, received comments from the SEC
on Friday afternoon, March 28, 1997. The Company's accountants have not yet had
a full opportunity to study, appreciate and respond to the Commission's
comments and requirements. Some of these comments may require material
amendments to the substantive, narrative and financial discussions and
information contained in this report, including the Financial Statements which
follow, which may require the Company to file an amendment to this annual
report.
43
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders
Electronics Communications Corp.
We have audited the accompanying consolidated balance sheets of
Electronics Communications Corp. and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Electronics Communications Corp. and subsidiaries as of December 31, 1996 and
1995, and the consolidated results of their operations and their cash flows for
the years then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 21 to the
financial statements, the Company has suffered recurring losses from operations
and has a net working capital deficiency that raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 21. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
STETZ, BELGIOVINE CPAs, P.C.
February 17, 1997
Montclair, NJ 07042
44
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
------------
1996 1995
---- ----
CURRENT ASSETS
Cash........................ $179,188 $18,000
Restricted Cash............. -- 1,100,000
Accounts Receivable (Net of
$574,910 and $80,987 Allowance
for Doubtful Accounts at
December 31, 1996 and 1995,
respectively)............. 676,797 2,204,789
Inventories................. 187,953 476,796
Bid Deposit................. -- 1,000,000
Loan Receivable............. 114,560 550,000
Prepaid Expenses............ 12,162 78,849
----------- ----------
TOTAL CURRENT ASSETS........ 1,170,660 5,428,434
----------- ----------
PROPERTY AND EQUIPMENT
Property and Equipment...... 2,754,910 335,858
Accumulated Depreciation.... (634,314) (75,544)
----------- ----------
NET PROPERTY AND EQUIPMENT.. 2,120,596 260,314
----------- ----------
OTHER ASSETS
PCS Licenses................ 26,452,200 --
Deferred Interest........... 479,401 --
Loan Origination Fees....... 186,839 --
Paging Carrier Agreement.... 980,022 --
Deferred Private Placement Costs 237,243 225,787
Deferred License Costs...... 335,932 293,810
Security Deposits and Other
Assets.................... 160,795 38,313
Goodwill.................... 66,202 --
Deferred Registration Costs. 84,176 --
----------- ----------
TOTAL OTHER ASSETS................... 28,982,810 557,910
----------- ----------
TOTAL ASSETS................ $32,274,066 $6,246,658
----------- ----------
----------- ----------
See Notes to Consolidated Financial Statements.
45
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE
SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31,
------------
1996 1995
---- ----
CURRENT LIABILITIES
Accounts Payable..................... $ 1,956,329 $1,783,344
Notes Payable-Other.................. 1,081,538 28,000
Notes Payable-Bank................... 95,000 1,225,000
Notes Payable-Stockholders........... 181,677 252,007
Current Portion of Obligations
Under Capital Leases...... 234,885 50,244
Current Portion of Long Term Debt.... 8,793 --
Private Placement Advance............ 500,000 116,223
Accrued Expenses..................... 552,005 248,764
Accrued Interest..................... 493,401 --
Customer Deposits.................... 24,009 --
----------- ----------
TOTAL CURRENT LIABILITIES............ 5,127,637 3,703,582
----------- ----------
LONG TERM LIABILITIES
Notes Payable........................ 23,806,980 --
Long Term Debt....................... 43,971 --
Obligations under Capital Leases..... 745,639 78,801
----------- ----------
TOTAL LONG TERM LIABILITIES.......... 24,596,590 78,801
----------- ----------
Minority Interest...................... 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 December 31, 1996... 40,000 --
Common Stock, par value $.05 per share,
40,000,000 authorized, issued and
outstanding 12,189,174 and 3,003,697 at
December 31, 1996 and 1995, respectively 609,460 150,186
Additional Paid-In Capital........... 16,102,199 5,320,629
Retained (Deficit)................... (8,611,593) (2,947,539)
Subscription Receivable.............. (6,000,000) --
Notes Receivable Arising from Common Stock
Purchase Warrants Sold............. (5,701) (59,001)
----------- ----------
TOTAL STOCKHOLDERS' EQUITY............. 2,134,365 2,464,275
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $32,274,066 $6,246,658
----------- ----------
----------- ----------
See Notes to Consolidated Financial Statements.
46
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Notes Receivable
Additional Retained Arising From
Paid-in Earnings Common Stock Subscription
Shares Amount Shares Amount Capital (Deficit) Purchase Warrants Receivable Total
------ ------ ------ ------ ------- --------- ----------------- ----------- -----
Preferred Stock Common Stock
--------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of
January 1, 1995.. 240,000 $2,400 1,516,086 $75,804 $644,942 ($318,580) ($99,000) -- $305,566
Payment of Loan
for Purchase B
Warrants ........ -- -- -- -- -- -- 39,999 -- --
Conversion of
Preferred Shares. (240,000) (2,400) 240,000 12,000 (9,600) -- -- -- --
Sale of Common
Stock ........ -- -- 1,000,000 50,000 3,396,569 -- -- -- 3,446,569
Sale of 2,000,000
"A" Warrants.... -- -- -- -- 200,000 -- -- -- 200,000
Sale of 300,000
"A" Warrants.... -- -- -- -- 26,100 -- -- -- 26,100
Stock Issued in
Connection with
Advertising and
Promotional
Services...... -- -- 200,000 10,000 1,065,000 -- -- -- 1,075,000
Replacement of
Shares........ -- -- 47,611 2,382 (2,382) -- -- -- --
Net Loss...... -- -- -- -- -- (2,628,959) -- -- (2,628,959)
---------------------------------------------------------------------------------------------------------------
Balance as of
December 31, 1995 -- -- 3,003,697 150,186 5,320,629 (2,947,539) (59,001) -- 2,464,275
Payment of Loan
for Purchase B
Warrants....... -- -- -- -- -- -- 53,300 -- 53,300
Sale of Common
Stock......... -- -- 69,430 3,472 152,812 -- -- -- 156,284
Issuance of Common
Stock for Settlement
of Potential
Litigation..... -- -- 34,715 1,736 72,033 -- -- -- 73,369
Sale of Common Stock -- -- 500,000 25,000 506,250 -- -- -- 531,250
Shares Issued in
Connection with
Marketing
Agreement...... -- -- 100,000 5,000 182,500 -- -- -- 187,500
Shares Issued in
Connection with
Consulting
Agreement...... -- -- 2,300,000 115,000 1,322,500 -- -- -- 1,437,500
Shares Issued in
Connection with
Acquisition..... -- -- 194,500 9,725 379,275 -- -- -- 389,000
Conversion of
Debentures...... -- -- 5,706,832 285,342 1,948,700 -- -- -- 2,234,042
Sale of Preferred
Stock........... 4,000,000 40,000 -- -- 5,960,000 -- -- (6,000,000) --
Shares Issued in
Connection with
Debt Agreements.. -- -- 280,000 14,000 257,500 -- -- -- 271,500
Net Loss.......... -- -- -- -- -- (5,664,054) -- -- (5,664,054)
---------------------------------------------------------------------------------------------------------------
Balance as of
December 31, 1996. 4,000,000 $40,000 12,189,174 $609,460 $16,102,199 $(8,611,593) $(5,701) $(6,000,000) $2,134,365
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
47
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED
DECEMBER 31,
------------
1996 1995
---- ----
SALES
Electronics................................ $2,978,142 $4,943,988
Commissions................................ 3,394,444 3,792,527
Paging & Two Way Radio..................... 984,851 --
----------- -----------
TOTAL SALES................................ 7,357,437 8,736,515
----------- -----------
COST OF SALES
Electronics................................ 2,895,598 4,368,493
Commissions................................ 2,851,363 3,195,601
Paging & Two Way Radio..................... 445,808 --
----------- -----------
TOTAL COST OF SALES........................ 6,192,769 7,564,094
----------- -----------
GROSS PROFIT............................... 1,164,668 1,172,421
----------- -----------
EXPENSES
Selling.................................... 2,092,053 1,103,963
General and Administrative................. 4,529,304 961,281
Advertising and Promotional Services....... -- 1,075,000
----------- -----------
TOTAL EXPENSES............................. 6,621,357 3,140,244
----------- -----------
OPERATING LOSS BEFORE OTHER INCOME,
OTHER EXPENSES AND INCOME TAXES............ (5,456,689) (1,967,823)
----------- -----------
OTHER INCOME
Minority Interest in Loss of Consolidated
Subsidiaries............................. 55,264 --
Interest Income............................ 17,200 31,234
----------- -----------
TOTAL OTHER INCOME......................... 72,464 31,234
OTHER EXPENSES
Interest Expense........................... 206,060 85,427
Settlement of Potential Litigation......... 73,769 --
Amortization of Bridge Financing Costs..... -- 606,943
----------- -----------
TOTAL OTHER EXPENSES....................... 279,829 692,370
----------- -----------
NET LOSS BEFORE INCOME TAXES............... (5,664,054) (2,628,959)
Income Taxes............................... -- --
----------- -----------
NET LOSS................................... ($5,664,054) ($2,628,959)
----------- -----------
----------- -----------
LOSS PER COMMON SHARE...................... ($1.06) ($1.11)
----------- -----------
----------- -----------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (NOTE 11).................... 5,337,876 2,368,809
----------- -----------
----------- -----------
See Notes to Consolidated Financial Statements.
48
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF CASH FLOWS
1996 1995
---- ----
YEAR ENDED
DECEMBER 31,
------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss..................................... ($5,664,054) ($2,628,959)
Adjustments to Reconcile Net Loss to Net Cash
Used By Operations:........................
Non-Cash Advertising and Promotional Services -- 1,075,000
Issue of Common Stock For Marketing and
Consulting Agreements...................... 1,625,000 --
Depreciation and Amortization................ 643,431 656,908
Provision for Doubtful Accounts.............. 493,923 50,790
Non-Cash Settlement of Potential Litigation.. 73,769 --
Minority Interest In Loss.................... (55,264) --
Changes in:
Accounts Receivable........................ 759,366 (664,636)
Inventories................................ 217,613 67,659
Prepayments................................ 55,024 (40,556)
Accounts Payable........................... (119,657) 60,477
Security Deposits.......................... (98,904) (17,715)
Accrued Expenses and Taxes Payable......... 303,241 140,256
Accrued interest........................... 14,000 --
Customer Deposits.......................... 24,009 --
----------- ----------
TOTAL ADJUSTMENTS........................ 3,935,551 1,328,183
----------- ----------
NET CASH USED BY OPERATING ACTIVITIES........ (1,728,503) (1,300,776)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Unrestriction of Cash........................ 1,100,000 --
Bid Deposit.................................. -- (1,000,000)
Notes Receivable Arising from Common Stock Purchase
Warrants................................... 53,300 39,999
Deferred Licenses Costs...................... (42,122) (293,810)
Deferred Private Placement Costs............. (11,456) --
Deferred Registration Costs.................. (84,176) --
License Costs................................ (1,645,220) --
Additions to Property and Equipment.......... (726,140) (88,021)
Loan Receivable.............................. (8,000) (550,000)
Paging Carrier Agreement..................... 725,580 --
Payment for Purchase of Threshold Communications,
Inc. net of cash acquired.................. (158,511) --
Other Assets................................. -- 6,496
----------- ----------
NET CASH USED BY INVESTING ACTIVITIES........ (796,745) (1,885,336)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of Shareholder Loans................ (70,330) 187,616
Proceeds of Other Loans...................... 703,538 (112,000)
Payments of Bridge Loans..................... -- (800,000)
Payments of Bank Loans....................... (1,130,000) 1,135,000
Restriction of Cash.......................... -- (1,100,000)
Deferred Private Placement Costs............. -- (225,787)
Private Placement Advance.................... 500,000 116,223
Net Proceeds from Debentures................. 2,234,376 --
Principal Payments under Capital Lease Obligation (118,836) (2,528)
Principal Payments of Long Term Debt......... (3,288) --
Sale of Common Stock......................... 570,976 3,869,385
----------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES.... 2,686,436 3,067,909
----------- ----------
NET INCREASE (DECREASE) IN CASH.............. 161,188 (118,203)
CASH, BEGINNING OF YEAR...................... 18,000 136,203
----------- ----------
CASH, END OF YEAR............................ $179,188 $18,000
----------- ----------
----------- ----------
See Notes to Consolidated Financial Statement.
49
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ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF CASH FLOWS
1996 1995
---- ----
YEAR ENDED
DECEMBER 31,
------------
SUPPLEMENTAL DISCLOSURE FOR CASH FLOWS
CASH PAID DURING THE YEAR FOR:
Interest...................................... $206,060 $85,427
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Property Acquired Under Capital Leases........ 970,315 131,573
Issuance of Common Stock in Connection with
Debt Agreements............................. 271,500
Issuance of Common Stock in Connection with
Conversion of Debentures.................... 2,234,676
Fair Value of Assets Acquired................. 1,114,000
Less: Cash Acquired........................... 16,489
Conversion of Loans Receivable to Equity
in Subsidiary............................. 550,000
Issuance Of Common Stock.................... 389,000
See Notes to Consolidated Financial Statement.
50
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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 a business combination accounted for as a reverse
acquisition (the "Acquisition"). Accordingly, the historical financial
statements of Free Trade Distributors, Inc. and Trade Zone Distributors, Inc.
(the "Operating Entities" or "Acquirers") are included in the consolidated
statements of operations for the periods prior to the Acquisition. The assets
acquired and the liabilities assumed were recorded at cost. Historical
Stockholders' Equity of the Operating Entities has been retroactively restated,
as set forth in Note 2, in that the number of shares of common stock received in
the Acquisition, after adjustment of the par value of the Company's and the
Acquirers' common stock with an offset to additional paid-in capital.
Retained Earnings (deficiency) of the Acquirers were carried forward.
In 1995, the Company formed 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.
In July 1995, the Company formed Personal Communications Network,
Inc.("PCN"), a Delaware corporation, as a majority (90%) owned subsidiary to
participate in the Federal Communications Commission auction for licenses to
engage in personal communications services ("PCS"). The Company has posted a bid
deposit of $1,000,000. On May 8, 1996 the Company obtained six PCS licenses for
$26,452,200 entitling it to operate wireless PCS telephone systems covering
nearly 1.5 million people in three states. Subsequent to year end, four (4)
officers and directors of the Company acquired a 24% interest in "PCN".
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.)
51
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ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
Electronics Communications Corp., subsequent to the Acquisition, and its
wholly-owned subsidiaries, Free Trade Distributors, Inc., Trade Zone
Distributors, Inc. (Trade Zone Distributors , Inc. has a wholly owned
subsidiary, Trade Zone Distributors, II, Inc. which is an inactive,
non-operating entity), Electrocomm Wireless, Inc., and 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). Depreciation expense charged to operations for the year
ended December 31, 1996 and 1995 was $546,535 and $49,965, 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 40% and 57% of the Company's total revenue
in 1996 and 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 46% and 43% of the
Company's total revenue in 1996 and 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 and amounted to 13% of revenues in 1996.
(F) CONCENTRATION OF CREDIT RISK
The Company maintains its major cash accounts in banks in the New York
and New Jersey Area. The total cash deposits are insured by the Federal Deposit
Insurance Corporation up to $100,000 per account.
The Company currently receives all of its commission revenue from two
major cellular radio carriers. Although there are a limited number of sources
for this type of revenue, management believes that other sources could provide
similar commissions on comparable terms. A change in carriers could cause a
delay in activations and a loss of sales which would affect operating results
adversely.
52
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ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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.
(H) RECENT PRONOUNCEMENTS
During 1996, the Company adopted the provisions of two Statements of
Financial Accounting Standards ("SFAS") issued by the Financial Accounting
Standards Board. SFAS 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," requires that long- lived assets
and certain identifiable intangibles be reviewed periodically for impairment.
The adoption of SFAS 121 did not have a material effect on the financial
statements.
SFAS 123, "Accounting for Stock-Based Compensation" defines a fair
value based method of measuring and recording compensation costs for employee
stock compensation programs. The provisions of this FASB was used in valuing all
stock-based compensation transactions.
(I) FAIR VALUE OF FINANCIAL INSTRUMENTS
At 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, as described in Note 7G, are deemed to be approximately equivalent as
the Note was issued based upon current interest rates.
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). 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
53
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
this transaction the Board approved a 1 for 5 reverse common stock split, in
order to reduce the authorized Common Stock from 42,000,000 shares to 8,400,000
shares and increase the par value of the shares from $.01 to $.05. The Company
also registered 1,000,000 shares of common stock owned by certain officers,
directors and stockholders. In addition, the Company granted the Underwriter an
option to purchase up to 100,000 shares of Common Stock and 200,000 Common
Stock Purchase Warrants. On September 12, 1995 the Underwriter exercised the
over-allotment option to purchase an additional 300,000 warrants. All
references in the financial statements to average number of shares outstanding,
per share amounts and stock option plan data have been restated to reflect the
reverse common stock split.
(C) On January 16, 1996 the Company consummated a Private Placement
Offering of 69,430 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
$156,285 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 an aggregate of 34,715 additional shares to the
subscribers. The additional cost of these shares issued were treated as an
increase in 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 Debentures (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 purchase the Company's common stock at $2.25
per share. The Company intends to use the proceeds of this offering to increase
its deposit in the PCS auction, build out its paging system and general working
capital purposes. As of December 31, 1996 $2,990,000 was converted into
5,706,832 shares of Common Stock in accordance with the Debenture.
(E) On April 8, 1996, the Company entered into a contractual agreement
with a public relations and direct marketing firm for the intention of making
its name and business better known to shareholders, investors and brokerage
houses. The agreement is for a period of four months. The Company issued 100,000
shares of its Common Stock and expensed $187,500 for marketing cost.
(F) On May 22, 1996, the Company completed a private placement of
500,000 shares of unregistered Common Stock for $625,000 ($1.25 per share).
These shares were sold at $.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 that 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
54
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ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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).
(H) On September 4, 1996, the Company entered into a Client Service
Agreement with a public relations firm. Pursuant to the terms of the agreement,
the firm was hired as a financial public relations consultant to promote the
Company's business to the financial community. The term of the agreement is for
two years. In consideration of the services to be performed by the firm, the
Company issued 2,300,000 registered shares of the Company's common stock. The
above transaction resulted in a non cash expense of $1,437,500.
(I) In October 1996, the Company issued 200,000 shares of common stock
to a private lender as consideration for borrowing $500,000 (See Note 7H). In
addition, the private lender was granted 400,000 Class A Warrants with "Piggy
Back" rights. The shares and warrants were valued at $183,750 and are included
as loan origination fees and being amortized over the term of the loan.
(J) In November 1996, the Company issued 80,000 shares of common stock
to a private lender as consideration for borrowing $200,000 (See Note 7J). In
addition, the private lender was granted 160,000 Class A Warrants with "Piggy
Back" registration rights. The shares and warrants were valued at $87,750 and
are included as loan origination fees and being amortized over the term of the
loan.
(K) In December 1996, the Company by a private placement memorandum, is
offering for sale a maximum of 2,200,000 and a minimum of 700,000 units at a
price of $1.50 per unit. Each unit consists of one (1) share of ECC common stock
and one and one-half (1 1 2) Class A Warrants. The Class A Warrant entitles the
purchaser to purchase one (1) additional share of common stock at $5.00 per
share, subsequently reduced to $2.25 per share, at any time prior to May 12,
1999, subject to prior redemption by the Company. For additional details
reference is made to the Private Placement Memorandum dated December 6, 1996.
Subscriptions for 818,000 units have been received as of February 12, 1997.
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
$758,088 for the sale of electronic goods, $240,908 for commissions, and
$252,711 for the sale of radio paging and two way radio service at December 31,
1996 and $1,503,303, $782,473 and $-0- at December 31, 1995.
NOTE 4-OTHER ASSETS
(A) Deferred Private Placement Costs consists of certain legal,
accounting, printing fees and other costs in connection with the private
placement described in Note 2K. These costs, together with any additional costs
incurred in connection with the placement will be recorded as a reduction of
the proceeds to be received from the sale of the securities offered.
(B) Deferred License Costs consists of various legal, consulting and
registration fees in connection with obtaining paging licenses, two-way radio
licenses and personal communication service licensing. Any interest cost
associated with obtaining these licenses will be capitalized. The licenses when
put into service will be amortized over a fifteen year period.
(C) The Paging Carrier Agreement consists of six paging licenses with
various paging carriers. The cost of such agreements are being amortized over a
fifteen year period.
55
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(D) The PCS licenses were awarded in a Federal Communications
Commissions "C" Block Auction. The markets awarded the Company include
Elmire-Corning, New York; Bangor/Lewiston-Auburn/Waterville-Augusta, Maine; and
Burlington/Rutland-Bennington, Vermont. The Vermont markets encompass virtually
the whole state. The Maine markets cover a majority of the population and most
of the state geographically. The licenses expire and are subject to renewal
after ten (10) years.
The Company's total winning bids amounted to $26,452,200, after the 25%
discount provided to small businesses, which the Company qualifies for, under
the terms of the auction. The Company deposited cash of $2,645,220. The
remaining balance will be paid out over the next 10 years with 7% interest only
during the first six years. Included on the license costs are certain legal fees
incurred in obtaining the license. Also included in these costs are $7,630 of
capitalized interest. The company has not begun PCS service. Upon inception of
such services, the Company will amortize the licenses and related costs over a
10 year period.
NOTE 5 - LOAN RECEIVABLE
On December 31, 1996 the loan receivable-other consists solely of a
note due from one of the Company's consultants. This note is due December 31,
1997 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 was fully
refundable in the event the Company was not the highest bidder. On May 8, 1996
the Company obtained six PCS licenses entitling it to operate wireless PCS
telephone systems covering nearly 1.5 million people in three states (See Note
4D). The bid deposit is included in PCS Licenses at December 31, 1996.
NOTE 7-NOTES PAYABLE
(A) Notes Payable consist of the following: (A) Notes Payable-Other in
the amount of $28,000 at December 31, 1995, and $5,000 at December 31, 1996
with interest at 10%, are payable on demand. Payment of the notes are
personally guaranteed by certain officers and stockholders, and secured by a
pledge of their personal property.
(B) On April 18, 1995, the Company entered into a financing agreement
with a bank in the amount of $100,000. This loan is personally guaranteed by the
Company's President, cross corporate guaranteed by Free Trade Distributors, Inc.
and secured by the Company's inventory. Interest is payable monthly at the rate
of 1.5% per annum in excess of the bank's fluctuating prime lending rate. As of
the date hereof, the interest rate was 10.5%. The loan became due and payable on
April 18, 1996. At December 31, 1996 the balance on this loan was $95,000. This
note was temporarily extended by the bank . On June 17, 1996 the bank extended
the due date until April 17, 1997.
(C) On October 6, 1995, the Company entered into a lending arrangement
with a bank. In connection herewith, 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 was paid in 1996.
(D) 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
56
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
was paid in 1996.
(E) On February 29, 1996, the Company entered into a financing
arrangement with a corporation in the amount of $134,000. Interest is payable at
a rate of 10% in monthly installments of $1,117 per month. As additional
consideration, the Company issued the corporation 800,000 "A" Warrants with 90
day registration rights and "Piggy Back" registration rights with any other
offering of the Company. The balance of this loan was $109,711 at December 31,
1996.
(F) In connection with TCI's acquisition of GCE, the Company assumed a
$350,000 non-interest bearing note payable to a corporation owned by a
shareholder of the Company. The balance of this loan was $265,121 at December
31, 1996.
(G) 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 has not
been paid. A default under this note ("Event of Default") shall occur if the
maker remains delinquent for more than 90 days.
(H) On September 20, 1996, the Company entered into a loan agreement
with a private lender, pursuant to which the Company borrowed $500,000. The loan
bears interest at the rate of 10% per annum. The loan becomes due and payable on
or before June 20, 1997, however the Company may request an automatic three (3)
month extension on the due date. The Company used the proceeds of this loan for
general corporate purposes.
(I) 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 at December 31, 1996 was $52,764.
(J) On October 21, 1996 the Company entered into a loan agreement with
a private lender in the amount of $200,000. The loan is due in November 1997
with interest at 10% per annum. The loan is secured by all of the Company's
current accounts receivable as well as all equipment and fixtures owned by the
Company. See Notes 2J and 13.
NOTE 8-CAPITAL LEASE
Capital Leases include $1,117,073 for equipment. Minimum future lease
payments under capital leases as of December 31, 1996 for each of the next five
years and in the aggregate are:
1997......................................$ 364,917
1998...................................... 349,959
1999...................................... 298,975
2000...................................... 203,982
2001...................................... 55,797
----------
Total Minimum Lease Payments............. 1,273,630
Less: Amount Representing Interest....... (293,106)
----------
Present Value of Net Minimum Lease
Payments............................... 980,524
Less: Current Maturities included in
Current Liabilities.................... (234,885)
----------
Long Term Obligations Under Capital
Leases................................. $ 745,639
----------
----------
57
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ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The interest rates on the capitalized leases range from 10% to 29.17%
and are imputed based on the lower of the Company's incremental borrowing rate
at the inception of each lease or the lessors implicit rate of return.
NOTE 9-NOTES PAYABLE-STOCKHOLDERS
Notes Payable-Stockholders are unsecured and payable on demand with
interest at rates from 7.5% to 10.65% per annum.
NOTE 10-OTHER ADVERTISING, PROMOTIONAL AND MARKETING SERVICES
(A) 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.
(B) Various agreements described in Notes 2E and 2H were entered into
during 1996. These transactions resulted in a non-cash expense of $1,625,000 in
1996.
(C) On October 7, 1996 the Company entered into a consulting agreement.
Pursuant to the agreement the consulting firm is to provide financial consulting
and advisory services to the Company and its subsidiary PCN, including, without
limitation, general advice with respect to financing, acquisition, joint venture
or other corporate transactions. In consideration of the services to be rendered
PCN is issuing to the consulting firm or its designees ten shares of its common
stock representing an aggregate of 10% of the issued and outstanding shares of
PCN.
NOTE 11-LOSS PER COMMON SHARE
The Company computes loss per common share by dividing the net loss by
the weighted average number of common stock and dilutive equivalent shares
outstanding, as retroactively adjusted to reflect shares issued for the
business combination described in Note 1A and the 1 for 5 reverse common stock
split described in Note 2A, and common stock equivalents outstanding during the
period. 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 12-CONVERTIBLE PREFERRED STOCK
On July 23, 1996, the Board of Directors of the Company authorized the
issuance of an aggregate of 4,000,000 shares of Series B Preferred Stock
("Preferred Stock"). Each share of Preferred Stock is valued at $1.50 per share
and convertible into 1.5 shares of the Company's Common Stock. These shares
were purchased by three (3) year Promissory Notes ("Notes") bearing interest at
the rate of 7% per annum. The interest shall accrue and not be payable until
the securities are sold. The Notes shall be immediately extendible for
additional one year terms. The Notes are non-recourse, but collateralized by
the Pledge of the Preferred Stock. Each share of Preferred Stock is subject to
a three year vesting period, whereby 1/3 was immediately vested, and the
balance to be vested during the next two years as long as the aforementioned
individuals remain as either an officer or director of the company.
NOTE 13-WARRANTS TO PURCHASE COMMON STOCK
(A) 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
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ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
(B) During 1996, the company issued 560,000 shares of Class A Warrants
in connection with obtaining financing from certain private lenders. The
Warrants entitle the holder to purchase one share of common stock at a price of
$2.50 and are exercisable through May 12, 1999.
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 carry-forwards that it does not expect to utilize pursuant to Internal
Revenue Regulations.
NOTE 15-CONTINGENT LIABILITIES
(A) On December 1, 1994, the Company entered into an employment
agreement with the President of the Company for a term of five years with an
option for an additional three one year terms. The agreement provides for
annual compensation of $150,000 during the term of the employment agreement and
entitles the President to certain fringe benefits, including automobile
maintenance, disability insurance, medical benefits and life insurance
coverage. The President has agreed that during the term of his agreement and
for 12 months thereafter (unless the agreement is terminated without cause), he
will be subject to non-competition provisions. Upon termination of employment
without cause, the President will be entitled to a lump sum payment of $75,000
multiplied by the number of years of his employment by the Company.
(B) The Company has engaged a management company, which is an affiliate
of the Underwriter used in the Public Offering described in Note 2B, as the
Company's management consultant, for a period of 15 months commencing December
14, 1994, at a fee of $75,000 (exclusive of out-of-pocket expenses), which was
paid on May 12, 1995. In addition, the Company has agreed, subject to any
required regulatory approvals, to pay the Representative a finder's fee, in the
event that the Representative originates within five years following the
Effective Date of the Offering a merger, acquisition, joint venture or other
transaction to which the Company is party, in the amount equal to 5% of the
first $4,000,000, 4% of the next $1,000,000, 3% of the next $1,000,000 and 2% of
the excess, if any, over $6,000,000 of the consideration actually received by
the Company in any such transaction.
(C) On June 1, 1995, the Company entered into a consulting agreement
with a corporation owned by four of the Company's legal representatives for non-
legal services. In consideration for services performed by the consultant the
Company agreed to pay $144,000 per year for five years payable in monthly
installments of $12,000.
(D) On May 17, 1995, the Company entered into an employment agreement
with the Executive Vice President, 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 the Executive Vice President to
certain fringe benefits, including automobile maintenance, disability insurance,
medical benefits and life insurance coverage. The Executive Vice President 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, the
Executive Vice President will be entitled to a lump sum payment of $50,000
multiplied by the number of years of his employment by the Company
59
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ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(E) Effective September 12, 1996, the Company entered into Employment
Agreement with the Secretary of the Company. The form of the Agreement is for
five years, at an annual salary of $75,000, plus a monthly car allowance of
$750/month.
NOTE 16 - MAJOR SUPPLIERS
Free Trade Distributors, Inc. purchased 100% of its cellular
telephones and related accessories from four major suppliers and Trade Zone
Distributors, Inc. received 100% of its income from two cellular radio
suppliers.
NOTE 17-OPERATING LEASE
On May 15, 1996, the Company entered into a five year operating lease
expiring May 31, 2001 for a 14,000 square foot warehouse and office facility.
The Company has an option to renew the lease for a 5 year period at an adjusted
annual rent.
Minimum future rental payments under this non-cancelable operating
lease for each of the remaining years are:
1997................................................. $110,888
1998................................................. 110,888
1999................................................. 110,888
2000................................................. 110,888
2001................................................. 46,203
--------
Total Minimum Future Rental Payments................. $489,755
========
In addition, the Company rents tower space at numerous locations under
terms ranging from month to month to 5 years at a minimum annual rental of
approximately $200,000. Rent expense for 1996 and 1995 was approximately
$232,000 and $64,000 respectively.
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 which adopted a Stock Option Plan
(the "Plan") approved by stockholders, under which, options to purchase up to
an aggregate of 500,000 shares of Common Stock are available for grants to
officers, directors, consultants and key employees of the Company. The Plan
provides for the grant of incentive stock options, non-qualified stock options
and director's options. The Plan will terminate in 2004, unless sooner
terminated by the Board of Directors. As a result of the reverse split the
Board of Directors, with stockholders approval, increased the number of shares
of Common Stock, after the effective date of the reverse split, which may be
subject to options granted under the Plan from 100,000 to 300,000. On July 10,
1995 the Company issued 20,000 options to a director of the Company at a price
of $3.80, 5,000 of these options were exercisable immediately, 5,000 on July
10, 1996, 5,000 on July 10, 1997 and 5,000 on July 10,1998 and expire on July
10, 2,000. The fair value of the stock was less than the option price therefore
no compensation expense was recognized in 1995. No shares have been excised
under the plan.
NOTE 20-PENDING LITIGATION
(A) 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
60
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
contract, tortious interference with contract and tortious interference with
prospective economic advantage and business relations. The complaint seeks
damages in excess of $5,000,000. This action was commenced because the Company
expended significant monies and resources including the issuance of 200,000
shares of the Company's Common Stock to a consultant in anticipation of South
American cellular telephone program which the Company was to undertake
exclusively on behalf of Toshiba. Immediately prior to the commencement of the
program, Toshiba discontinued manufacturing the line of cellular telephones
that the program was designed to offer. This unilateral decision has caused
significant damages to the Company. The defendants, Toshiba and Audiovox, moved
to dismiss the case, claiming that the Company had not pled a cognizable
antitrust cause of action, and that the remaining claims should be dismissed
for lack of supplemental jurisdiction. On August 12, 1996 the Court ruled in
favor of the motion of defendants Toshiba and Audiovox and the cause was
dismissed on such date. The Company has appealed the Court's ruling and
settlement negotiations are ongoing. If an adequate settlement cannot be
reached, the Company will vigorously prosecute this claim.
(B) In addition, a supplier has made a claim against the Company for
approximately $400,000 with respect to goods sold and delivered to the Company.
The Company believes it has substantial counterclaims to this action.
Negotiations with respect to a non-judicial resolution will be commencing,
however, no assurance can be provided that such negotiations will be
successfully accomplished.
NOTE 21-BUSINESS PLAN AND LIQUIDITY
The Company's financial statements for the year ended December 31,
1996 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 $5,664,054,
and $2,628,959 for the years ended December 31, 1996 and 1995. The Company has
a working capital deficiency of $3,956,977 at December 31, 1996. Management
recognizes that the Company must generate additional resources or consider
modifying operations to enable it to continue operations with available
resources. Management's plans include consideration of the sale of additional
equity securities under appropriate market conditions, alliances with entities
interested in and resources to support the Company's operation or other
business transactions which would generate sufficient resources to assume
continuation of the Company's operations.
The Company has retained investment banking counsel to advise it on the
possible sale of equity securities as well as to introduce and assist in the
evaluation of potential merger and partnering opportunities. The Company also
has retained independent consultants to assist it to identify other entities
interested in its business. Management expects that these efforts will result in
the introduction of other parties with interests and resources which may be
compatible with that of the Company. However, no assurances can be given that
the Company will be successful in raising additional capital or entering into a
business alliance. Further, there can be no assurance, assuming the Company
raises additional funds or enters into a business alliance, that the Company
will achieve profitability or positive cash flow. If the Company is unable to
obtain adequate additional financing or enter into such business alliance,
management will be required to sharply curtail the Company's operations.
61
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ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 22-PRO FORMA INFORMATION
The following unaudited pro forma combined results of operations for
the year ended December 31, 1996 accounts for the acquisition described in Note
2G as if it had occurred on January 1, 1996.
UNAUDITED PRO FORMA COMBINED RESULTS OF OPERATIONS
YEAR ENDED
DECEMBER 31,
1996
----
Sales....................................... $8,492,801
Net Loss.................................... ($5,815,046)
Net Loss Per Common Share................... $(1.09)
62
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ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT OF THE REGISTRANT.
Set forth below are the names and ages of and the positions and offices held
by each of the directors and executive officers of the Company.
NAME AGE POSITIONS AND OFFICES
- ---- --- PRESENTLY HELD WITH THE COMPANY
-------------------------------
William S. Taylor........... 36 CEO, President and Chairman of the Board
Les Winder.................. 43 Vice President, Treasurer and Director
Brenda Taylor............... 57 Secretary and Director
Mal Gurian.................. 70 Director
Robert DePalo............... 42 Director
Ira J. Tabankin............. 48 Director
A director is elected to hold office until the next annual meeting of
stockholders and until his or her successor is elected and qualified. Vacancies
on the Board of Directors may be filled by the remaining directors until the
next annual meeting of stockholders. The last annual meeting of stockholders was
held on November 7, 1996, at which each of the above directors was elected to
serve until his or her successor, if any, is elected and takes office. (For a
discussion of the votes cast for the approval of each of the foregoing
directors, see "Item 3." above.)
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Mr. Taylor was appointed the President and Chief Executive Officer and
was elected Chairman of the Board of the Company in February 1994. Mr. Taylor is
a co-founder of Trade Zone and Free Trade and has been an executive officer of
each since 1992 and was appointed the President of these companies in 1993. Mr.
Taylor was President and founder of Cellcom Telephone Company and served as its
President from 1984-1992. Cellcom Corp., the parent of Cellcom Telephone
Company, filed for protection under Chapter 11 of the United States Bankruptcy
Code in April 1992. On October 7, 1993, Cellcom Corp.'s modified and
consolidated plan of reorganization was confirmed and as of the date hereof has
been substantially consummated with the meaning of Section 1101 (2) of the
Bankruptcy Code. Mr. Taylor remains a director and secretary of Cellcom Corp.
Mr. Taylor is a member of the Radio Club of America, one of the oldest and most
prestigious communication organization in the United States. Mr. Taylor is a
frequent speaker in the cellular communications industry and has been the
recipient of numerous industry awards.
Mr. Winder was appointed Vice President and Treasurer of the Company in
February 1994, in connection with the acquisition of Free Trade and Trade Zone.
Mr. Winder has been engaged in the cellular telephone industry since its
inception in the early 1980's. From 1983-1992 he co-founded and was Vice
President of EMA, Inc. and Jersey Cellular Systems, Inc. Both of which companies
were engaged in cellular sales and marketing. During the same period Mr. Winder
was General Partner of Eastern Marketing Associates, which acted as sales and
marketing consultants to many large cellular equipment manufacturers. Mr. Winder
is a member of the Radio Club of America.
Mrs. Taylor, mother of William S. Taylor, was appointed Secretary and
elected Director of the Company in February 1994. Mrs. Taylor is a co-founder of
Trade Zone and Free Trade and has been an executive officers of each since their
inception. From 1984-1991, Mrs. Taylor was Secretary and office manager of
Cellcom Telephone Company. See Mr. Taylor's biography for information concerning
the bankruptcy proceeding of Cellcom Corp., the parent of Cellcom Telephone
Company.
Mr. Gurian was elected a Director of the Company in March 1995. From
January 1993 to the present, Mr. Gurian has been Chairman of the Board and CEO
of Authentix Network, Inc., and is one of the pioneers of the Personal
Communications Industry. He began his career as the Vice President of Radio
Telephone Corporation in 1960. He then became Senior Vice President of Aerotron
Inc., a Siemans Company. In 1980, three years before the launch of the first
commercial cellular service in the U.S., Mr. Gurian was recruited by OKI
Electric Industries Company of Japan to start and build OKI Telecom, the
companies Cellular Telephone Division. While President and member of the Board
of Directors of OKI Telecom's Cellular Telephone Division, the worlds first
manufacturer of a cellular telephone, Mal Gurian was responsible for OKI
receiving the first FCC type certification for a cellular telephone. Following
the divestiture of AT&T, Mr. Gurian was instrumental in negotiating for OKI the
only private label contracts with the seven Regional Bell Operating Companies.
Under Mr. Gurian's leadership, OKI Telecom quickly became the premier provider
of cellular phones to the U.S market. Also under Mr. Gurian's leadership, the
company successfully introduced and marketed several new products, including the
first briefcase portable cellular telephone, the OKI/Chrysler "Visor Phone" and
OKI's credit card "Swipe" Telephone. After leaving OKI, Mr. Gurian served as
President of Cartell, Inc. in Detroit and Cellcom Cellular Corporation in New
Jersey until late 1991. Mr. Gurian became Chief Executive Officer and a Director
of Universal Cellular Corporation in early 1992. He became Chairman of the Board
and Chief Executive Officer of GlobalLink Communications, Inc. in January 1993
and remains in this position currently. He has developed strong relationships
with all major cellular carriers and is frequently consulted by key industry
leaders in important issues affecting the industry. Mr. Gurian serves as a
moderator and speaker in numerous industry conventions and forums. Mr. Gurian
has served as an advisor to many major companies including OKI, Sony, TRW and
the Communications Division of Murata as a corporate and strategic consultant.
He has been chosen to serve as an Arbitrator for the American Arbitration
Association and is on the Advisory Board of Sims Communications, Inc. in Delray
Beach, Florida. Mr. Gurian
64
<PAGE>
is a recipient of the "Sarnoff Citation" from the Radio Club of America in
addition to the "Special Service Award" and the "Fred Link Mobile Award." He
also received the "Chairman's Award," the highest recognition bestowed by the
National Association of Business and Educational Radio (NABER), in Washington,
D.C. and has served as a Director of that organization. He is currently a
Fellow and President Emeritus of the Radio Club of America amd has been a
Director from 1977 to 1980, Vice President from 1980 to 1992, Executive Vice
President in 1993 and President in 1994. Mr. Gurian is a 1995 recipient of an
honorary degree of the Popov Scientific Society from the St. Petersburg
Electrotechnical University in St. Petersburg, Russia. He is veteran of World
War II having served in the U.S. Marine Corps where he participated in seven
major South Pacific Campaigns; and he is listed In Marquis "Who's Who in
America" and Who's Who in the World."
Mr. DePalo was elected a Director of the Company in November 1995. Mr.
DePalo has been, in excess of the last 5 years, a private investment banker and
sole shareholder of Bayside Federal Equities, a private investment banking and
consulting firm. Mr. DePalo graduated New York University with a B.S. in
Accounting and received his M.B.A. in Management from Mercy-L. I. U. College.
Mr. Tabankin was elected a Director of the Company in September 1995.
From 1994 to the present, Mr. Tabankin has been President of 4 Sight L.C., a
computer software development joint venture between 4 Sight International and CE
Software. From 1991 to 1994, Mr. Tabankin was the General Manager of Robert
Bosch Corporation, responsible for the start up of that corporation's cellular
telephone products division. From 1987 to 1991, Mr. Tabankin was the Group Vice
President of Novatel Communication. At Novatel Communications, Mr. Tabankin's
responsibilities included the strategic planning, product development, multi-
site manufacturing, sales and marketing of Novatel's cellular telephone products
division.
Matt Edwards, an Advisory Board Member, is one of the earliest pioneers
of PCS, twice chosen (1990 and 1991) by RCR Magazine as one of ten industry
"Movers and Shakers" (along with Craig McCaw, Congressman Dingell, FCC Chairman
Al Sikes and Motorola Chairman George Fisher) and recognized by FCC Chairman
Sikes as instrumental in forming the PCS industry. Mr. Edwards has been vice
chairman of the Personal Communications Industry Association's ("PCIA")
Engineering Standards Committee establishing PCS standards for the U.S., and as
founder and president of Cellular 21, Inc. and Advanced Cordless Technologies,
Inc. (which purchased Cellular 21), filed the first experimental license
applications for PCS. In 1983, Mr. Edwards formed Nationwide Cellular Service,
Inc., which became the nation's largest cellular reseller. In 1986, Mr. Edwards
sold his interest in this company. Nationwide is now a part of MCI. In 1993, Mr.
Edwards co-founded Mariga Communications Corp. (wholly-owned by Novocomm, Inc.),
a company providing paging, SMR and FM broadcasting in Russia, Ukraine and
Crimea, and today acts as a technical consultant.
64
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ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth information concerning all remuneration
paid by the Company to the Company's executive officers and all executive
officers as a group for the year ended December 31, 1996:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long Term Compensation
------------------------------------ ----------------------------------
Awards Payouts
--------------------- ----------
Other Restricted
Annual stock LTIP All other
Name and Principal Position Year Salary ($) Bonus($) compensation award(s) Options/ payouts compensation
(1) (2) ($) (3) ($) SARs (#) ($) ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William S. Taylor* 1996 $150,000 -- $4,065.15 -- -- -- (4)(5)(6)
President, CEO and 1995 $166,641 $67,500 $6,132.43 -- -- -- (5)
Chairman of the Board (7) 1994 $83,212 $50,000 $3,800 -- -- -- (5)
Les Winder* 1996 $137,500 -- $2,224.50 -- -- -- (4)(5)(6)
Executive Vice President 1995 $117,245 $42,500 $2,777.65 -- -- -- (5)
and Treasurer, Director (8) 1994 $70,786 $50,000 $2,275.00 -- -- -- (5)
Brenda Taylor 1996 $75,000 -- $1,557.21 -- -- -- (4)(5)(6)
Secretary and Director 1995 $38,278 -- $778.61 -- -- -- (5)
1994 $36,173 -- -0- -- -- -- (5)
Robert DePalo 1996 $75,000 -- -- -- -- (4)(5)(6)
Director, Finance 1995 -0- -- -- -- -- (5)
1994 -0- -- -- -- -- (5)
<FN>
(1) As at September 12, 1996, the Board approved a 20% increase in the
annual compensation of Messrs. Taylor and Winder, effective December
1, 1996. Messrs. Taylor and Winder have agreed to defer such
increases, subject to accrual, until the Company's cash flow
improves.
(2) The payment of bonuses to Messrs Taylor and Winder for 1994 and 1995 was
deferred until the cash flow of the Company improves, as determined by
Management of the Company. No payments on account of these bonuses have
been made as at the date of this report.
(3) Messrs Taylor and Winder & Mrs. Taylor are also entitled to certain
fringe benefits under their employment agreements, including the
lease and maintenance of an automobile, disability insurance, medical
benefits and life insurance coverage. The amount listed in this
column reflects the aggregate value of such fringe benefits on an
annual basis.
(4) On June 3, 1996, subject to certain conditions, the Board of Directors of
the Company authorized the issuance to officers and directors of the
Company of an aggregate of 2,300,000 Class A Warrants, exercisable and
convertible upon the purchase of Common Stock, at a transfer price of
$5.00 per share, as compensation for certain loans and guarantees made
by Brenda Taylor and Messrs. Taylor, Winder and DePalo. Ms. Taylor and
Mr. DePalo were each issued 500,000 A Warrants. Mr. Taylor and Mr.
Winder were each issued 650,000 A Warrants. The Company reserved
2,300,000 Common Shares for issuance upon the exercise of such A
Warrants. This grant was part of an overall plan
and agreement to compensate such persons for providing certain personal
guarantees and for posting cash collateral to facilitate loans by the
Company to fund its bid deposits required to make the Company eligible
for the FCC's PCS licenses auction, and but for which guarantees, the
Company could not have secured adequate financing. These compensation
arrangements included the right to purchase up to six (6) shares of PCN
stock for $1,000 per share by each of Messrs. Taylor, Winder and DePalo
and Mrs. Taylor, for an aggregate of 24% of the stock of PCN. The
closing of the grant of the Class A Warrants and the purchase and
delivery of the PCN stock was conditioned on the
actual grant of the Company's PCS Licenses and the delivery and
acceptance of the Company's FCC Notes and related Security Agreements
by the FCC, substantially accomplished, or to be accomplished, prior to
the end of December, 1996, and was scheduled to occur forty-five (45)
days after the later to addition, the exercise of the Class A Warrants
was further conditioned on the requirement that each of the recipients
continue their employment with the Company through May 31, 1996, and
that they continue to be employed by the Company on the date of exercise
and conversion of the Warrants.
(5) On November 22, 1994, the Board of Directors of the Company authorized the
sale to Officers, Directors, principal shareholders and consultants of the
company of an aggregate of 1,000,000 B Warrants to purchase 1,000,000
shares of common Stock at $5.00 per share. The price per B Warrant is
$.10. As of the date of this Prospectus, 990,000 B Warrants were
issued. On January
66
<PAGE>
20, 1995, the Company agreed to reduce the exercise price of an aggregate
300,000 B Warrants owned by William S. Taylor (150,000), Brenda Taylor
(75,000) and Stewart Taylor (75,000), from $5.00 to $2.50. On the
effective date of this reduction the bid price of the Company's Common
Stock was $2.00. In addition, the exercise period of these 300,000 B
Warrants was changed so that they did not become exercisable until
February 1, 1996, and expire on the fourth anniversary of the Effective
Date. In exchange, the Company received certain financial guarantees
and extensions of certain loans due by the Company to William S. Taylor
and Stewart Taylor. On November 16, 1995, William S. Taylor, Brenda
Taylor, Stewart Taylor and Les Winder each sold for $.10 per B Warrant,
33,250 B Warrants or an aggregate of 133,000 B Warrants to Mr.
Joseph Albanese, who is a 49% owner of the Company's subsidiary, TCI.
On November 16, 1995, William S. Taylor, Brenda Taylor and Stewart
Taylor each sold, for $.10 per B Warrant, 50,000 B Warrants or an
aggregate of 150,000 B Warrants to Gary Holman. On November 16, 1995,
Les Winder sold, for $.10 per B Warrant, 50,000 B Warrants to Deborah
Lavana (40,000) and Merritt Fine (5,000) and Pauline Eskovitz (5,000).
On November 20, 1995, the Board of Directors authorized an amendment to
the Warrant Agreement between the Company and American Stock Transfer
and Trust Company (the Company's Warrant Agent) to provide for the
consolidation of B Warrants having the same economic terms as
outstanding A Warrants and to permit the holders of such B
Warrants to hold A Warrants. Accordingly, as of the date hereof,
there are 300,000 B Warrants remaining outstanding.
(6) On July 23, 1996, the Board of Directors of the Company, at a Special
Meeting of the Board of Directors, authorized the issuance of an
aggregate of 4,000,000 Series B Preferred Shares of the Company to
Brenda Taylor (1,000,000) and Messrs. Taylor (1,000,000), Winder
(1,000,000) and DePalo (1,000,000) in return for their personal
guarantees of approximately $3,000,000 of the Company's Subordinated
Convertible Debentures. Each share of the Series B Preferred Stock is
valued at $1.50 per share and convertible into 1.50 shares
of Common Stock. The Series B Preferred Shares are payable by a three
year Promissory Note bearing interest at the rate of 7% per annum, with
interest accruing, but not payable until the securities are sold. The
Promissory Notes are immediately extended for additional one-year terms.
The Series B Preferred Shares are fully paid and non-assessable. The
Promissory Notes are non-recourse, but are collateralized by a Pledge of
the Stock.
These Series B Preferred Shares are subject to a three (3) year
vesting period pursuant to which 1/3 of the shares will vest
immediately, and thereafter, on July 23, 1997, if Brenda Taylor and
Messrs. Taylor, Winder and DePalo are still employed by or a director
of the Company, an additional one-third shall vest and thereafter on
July 23, 1998, if the aforementioned individuals are still employed
by or a director of the Company at such time, the balance shall vest.
On July 23, 1996, the Company reserved 6,000,000 common shares for
issuance upon the conversion of these Series B Preferred Shares.
On October 17, 1996, at the Annual Meeting of Shareholders,
shareholders voting in person and by proxy, voted to approve
"Proposal No. 3" described in the Company's Notice of Annual Meeting
and Proxy Statement, which ratified this action by the Board of
Directors.
(7) Effective December 1, 1994, the Company entered into an employment
agreement with Mr. Taylor for a term of five years. In October, 1996
this Agreement was modified to provide for an option for an
additional three years, with annual one-year renewals thereafter,
exercisable in the sole discretion of Mr. Taylor. The agreement
provides for annual compensation of $150,000 during the term of the
employment agreement and entitles Mr. Taylor to certain fringe
benefits, including an automobile and maintenance, disability
insurance, medical benefits and life insurance coverage. Mr. Taylor
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, Mr. Taylor will be entitled to a lump sum
payment of $75,000 times the number of years of his employment by the
Company.
(8) On May 17, 1995, the Company entered into an employment agreement with Mr.
Les Winder, which agreement was also amended on October 1, 1996. The
term of the agreement is for five years with an option for an additional
three year terms, renewable annually thereafter at the option of Mr.
Winder. 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 an automobile (leasing and insuring),
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 times the number of years of his employment by the Company.
</TABLE>
Stock Option Plan
On September 27, 1994, the Board of Directors of the Company adopted a
Stock Option Plan (the "Plan"), 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 Directors' options. The plan will terminate in 2004, unless sooner
terminated by the Board of Directors. The
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Plan was amended by the Board of Directors on November 22, 1994, and approved
by shareholders, to increase the number of shares as to which options may be
granted from 100,000 to 300,000. The Plan permits the granting of awards to
employees, directors and consultants of the Company stock options. Stock
options granted under the Plan may be "incentive stock options," meeting the
requirements of Section 422 of the Internal Revenue Code of 1986, as amended,
or non-qualified options which do not meet the requirements of Section 422. The
Plan, as currently amended, provides that 500,000 shares of Common Stock will
be reserved for issuance pursuant to awards granted under the Plan. As of
September 30, 1996, the following stock options had been issued to officers,
directors and employees:
On July 10, 1995, the Company issued 20,000 options to Mal Gurian,
Director, at a price of $3.80 per share. 5,000 of these options were exercisable
immediately, 5,000 were exercisable on each of July 10, 1996, 1997 and 1998. The
options will expire if not previously exercised on July 10, 2000. The fair value
of the stock was less than the option price. Therefore, no compensation expense
was recognized in 1995.
On June 3, 1996, the Company issued an additional 50,000 options to Mal
Gurian and issued 10,000 options to Ira Tabankin, also a Director of the
Company, at a price of $1.80 per share, representing 80% of the then current bid
price of the Company's Common Stock as reported by NASDAQ. Twenty-five (25%)
percent of the grant (12,500 shares and 2,500 shares, respectively) were
exercisable immediately, and twenty-five (25%) percent will be exercisable on
each of June 3, 1997, 1998 and 1999. The options will expire if not previously
exercised on or before June 3, 2001.
The Plan will be administered by a committee to be appointed by the
Board of Directors. The Plan gives broad powers to the committee to administer
and interpret the Plan, including the authority to select the individuals to be
granted options, and to prescribe the particular form and conditions of each
option granted.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth as of March 21, 1997, the beneficial
ownership of the outstanding shares of the Common Stock of the Company owned of
record and beneficially by each person known to the Company to be the beneficial
owner of more than 5% of the outstanding shares of Common Stock, as well as
beneficial ownership of the outstanding Shares of the Common Stock of the
Company by each of its directors and its directors and officers as a group:
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NAME AND ADDRESS OF NUMBER OF SHARES PERCENTAGE OF
BENEFICIAL OWNER OF COMMON STOCK CLASS(1)(8)
- ---------------- BENEFICIALLY OWNED(9) -----------
---------------------
William S. Taylor............. 2,676,750(2) 10.95%
10 Plog Road
Fairfield, NJ 07004
Pres., CEO, Director
Les Winder.................... 2,066,750(3) 8.45%
10 Plog Road
Fairfield, NJ 07004
V.P., Director
Brenda Taylor................. 2,323,500(4) 9.5%
10 Plog Road
Fairfield, NJ 07004
Sect., Director
Mal Gurian.................... 120,000(5) .5%
14 Old Farmstead Road
Chester, NJ 07930
Director
Ira J. Tabankin............... 30,000(6) .125%
1851 N.W. 150th Court
Clive, IA 50325
Director
Robert DePalo................. 1,975,000(7) 8.0%
10 Plog Road
Fairfield, NJ 07004
Director
All Officers and Directors as a 9,192,000(8) 37.6%
group (6 persons)
- ------------------------
(1) There were 12,195,515 shares of Common Stock outstanding as of
December 31, 1996; 6,260,000 Class A Warrants convertible into a like
number of shares of Common Stock, and 4,000,000 shares of Series B
Preferred Non-Voting Convertible Stock, convertible into 6,000,000
shares of Common Stock, representing a total issuance of 29,949,174
shares on a fully diluted basis.
(2) Includes 886,750 shares of Common Stock issuable upon exercise of the A
Warrants, and 1,500,000 shares of Common Stock issuable upon the
conversion of Series B Preferred Shares.
(3) Includes 516,750 shares of Common Stock issuable upon the exercise of the
A Warrants and 1,500,000 shares of Common Stock issuable upon the
conversion of Series B Preferred Shares.
(4) Includes 70,000 shares owned by Stewart Taylor, father of William S.
Taylor and husband of Brenda Taylor, an aggregate of 633,500 (116,750
held by Stewart Taylor and 516,750 held by Brenda Taylor) shares of
Common Stock issuable upon exercise of A Warrants, and 1,500,000
shares of Common Stock issuable upon the conversion of Series B
Preferred Shares.
(5) Includes 70,000 shares of Common Stock issuable upon the exercise of stock
options, and 50,000 shares of Common Stock purchased by promissory note
on June 3, 1996.
(6) Includes 10,000 shares of Common Stock issuable upon exercise of stock
options and 20,000 shares of Common Stock purchased by promissory note
on June 3, 1996.
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(7) Includes 400,000 shares of Common Stock issuable upon the exercise of A
Warrants and 1,500,0000 shares of Common Stock issuable upon conversion of
Series B Preferred Shares.
(8) Includes an aggregate of 8,587,000 shares of Common Stock issuable upon
the exercise of warrants and options and the conversion of Series B
Preferred Stock owned by Officers and Directors.
(9) Without adjustment of Common Stock and A Warrants which will result from
the Private Offering, commenced on December 6, 1996, but not yet closed.
(See Item "12" for dilution related to that Offering.)
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During the Company's fiscal year, 1995, William S. Taylor loaned the
Company an aggregate of $263,778. As of December 31, 1995, the outstanding
amount due to Mr. Taylor was $111,069 with interest at 10%. In addition, Mr.
Taylor pledged 210,000 shares of the Company's Common Stock owned by him as
additional security for a loan with a bank, and personally guaranteed the
Company's obligations ($1,150,000) due to the bank.
In November 1995, Mr. Robert DePalo, a director of the Company, and Mr.
Winder also personally guaranteed the same bank indebtedness for $1,150,000.
In December, 1994, the Company sold for $.10 each an aggregate of
990,000 B Warrants to purchase an equal number of shares of Common Stock at a
price of $5.00 per share to William S. Taylor (470,000), Les Winder (100,000),
Brenda Taylor (200,000), Stewart Taylor (200,000) and Fawn Taylor McCauley
(20,000). The Warrants are exercisable immediately and expire on the fourth
anniversary of the Effective Date. In payment, the Company received promissory
notes to the Company aggregating $99,000. The notes bear interest at the rate of
8% per annum and are due the earlier of the date of exercise of the B Warrants
or December 1, 1996. On November 28, 1996, the Company extended the due date on
these notes to December 31, 1997. On January 20, 1995, the Company agreed to
reduce from $5.00 to $2.50 the price of 300,000 B warrants (150,000 owned by
William S. Taylor and 75,000 each owned by Brenda and Stewart Taylor) and amend
the exercise period so that these 300,000 B Warrants are not exercisable until
February 1, 1996. In exchange, the Company received certain financial guarantees
and extensions of certain loans due by the Company to William S. Taylor and
Stewart Taylor. On November 17, 1995, the Board of Directors voted to convert
690,000 of these B Warrants to Class A Warrants having substantially identical
rights and privileges.
The operations of the Company's subsidiaries since inception in 1991 to
date have been funded principally from cash flow from operations, capital
investments and loans from Officers, Directors, principal stockholders and third
parties. Although the Officers and Directors of the Company have provided the
financial accommodations to the Company in the past, there can be no assurance
that they will continue to do so in the future. In October, 1996, Mr. Taylor and
Mr. Winder loaned the Company $40,000 and $22,000, respectively. In addition the
Company has a $100,000 revolving credit line with a bank. This loan is
personally guaranteed by the Company's President and a cross corporate guaranty
of Free Trade and secured by the Company's inventory. As of September 30, 1996,
there was an outstanding balance under this loan of $55,000 with interest
payable monthly at the rate of 1.5% per annum in excess of the bank's
fluctuating prime lending rate.
As of September 30, 1996, the interest rate was 10.5%. This loan is due and
payable on April 17, 1999.
On October 6, 1995, the Company entered into a lending agreement with a
bank. In that connection, the Company obtained a credit line to borrow up to
$700,000, at an interest rate of 3/4% above the bank's base loan rate. As of
September 30, 1996, the interest rate was 9.5%. The Company deposited a $700,000
three month certificate of deposit as collateral for such loan. The
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certificate of deposit earns 5% interest. The loan is also secured by certain
Officers' personal guarantees (William S. Taylor and Les Winder), 245,000
shares of their stock, and all of the assets of the Company. The note is a
ninety (90) day note which becomes due and payable on October 6, 1996. The note
has been renewed for successive three month terms since January 6, 1996.
On December 22, 1995, the Company entered into a lending arrangement
with the same bank. In connection, the Company borrowed $450,000 at an interest
rate of 1% above the bank's base lending rate, payable in ninety (90) days. On
September 30, 1996, the interest rate was 9.75%. The Company deposited a
$400,000 three month certificate of deposit with the bank as collateral for such
loan. The certificate earns 5% interest. The loan is also secured by certain
Officers' and Directors' personal guarantees (William S. Taylor, Brenda Taylor,
Les Winder and Robert DePalo) and the Company's inventory. There is also a
ninety (90) day note which becomes due on December 22, 1996 and has been renewed
successively since March, 1996.
On January 16, 1996, the Company consummated a Private Placement of
69,460 shares of its Common Stock, $.05 par value, at a price of $2.25 per
share. The total offering resulted in gross proceeds of $156,217.50. The
original projected amount of this offering was $1,000,000, but the offering was
terminated by the Company due to a lack of support by the underwriters' group.
Each subscriber, in addition to the shares from that offering, received demand
registration rights, which required the Company to file a registration statement
upon request of 25% or more of the shares sold in the offering at any time
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. At that time, the Company was unable to comply with the
registration request due to out-of-date financials. In order to avoid potential
litigation, the Company issued an aggregate of 34,715 additional shares to the
subscribers, 1/2 share for each share purchased) in full settlement of all
claims.
In light of the fact that the Company did not raise sufficient monies
in the January, 1996 Private Placement, and due to significant capital
restrictions resulting from substantial deposits with the FCC, and its
collateral with its bank, on February 29, 1996, the Company was compelled to
borrow $134,000 from an unrelated third-party, Technics in Design &
Manufacturing, Inc. ("TDMI"). Interest on this loan is payable at 10% per annum
in monthly installments of $1,117 per month. To further induce this loan, and as
additional consideration, the Company also issued 800,000 A Warrants to TDMI,
with ninety (90) day Registration Rights and "Piggyback" registration rights.
The Warrants are exercisable until May 12, 1999, and permit the holder to
convert the Warrants and purchase 800,000 shares at $5.00 per share. On the date
of the grant of the Warrants, the average bid price of the Company's Common
Stock was $2.25.
At approximately the same time, the Company also experienced a cash
shortfall and was unable to post the required deposit to be entitled to bid at
the FCC Auction. To assist the Company in obtaining financing to facilitate its
bid, William S. Taylor, Les Winder, Brenda Taylor and Robert DePalo guaranteed
loans by the Company in the sum of approximately $1,150,000 and posted certain
cash collateral (these loans are more particularly described above in connection
with the discussion of the Company's bank loans as at October 6, 1995 and
December 22, 1995). In consideration for this loan and guarantee accommodation,
and the posting of cash collateral, the Board of Directors authorized the
purchase of 24 shares by such persons (six (6) shares each) of PCN's sole class
of authorized and issued Common Stock and the grant of 2,300,000 Class A
Warrants. The purchase of the PCN stock and delivery of the Class A Warrants
were subject to certain conditions relating to the grant of the PCS Licenses,
and delivery of the FCC Notes and related security agreements by the Company. As
a result, the closing of those transactions is not scheduled to occur until in
or about mid-February, 1997.
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On March 21, 1996, the Company entered into a letter of intent with an
investment banking firm, Bay Tree Associates, pursuant to which the Company was
to offer $6,000,000 principal amount of the Company's Subordinated Convertible
Debenture (the "Debenture"). The principal amount of the Debenture was to 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 was less. The Debenture was to bear interest at the rate of 5% per
annum payable on April 1 of each year commencing April 1, 1997. The Debentures
were to be redeemable and callable for conversion under certain circumstances.
Due to the failure of the investment banking firm to perform its sales
undertakings, the Offering was terminated at $2,990,000 principal amount of
Debentures, which were subsequently converted into 5,706,622 shares of the
Company's Common Stock. Commodore Funding, Inc. received 1,400,000 Class A
Warrants, convertible under certain circumstances at a purchase price of $2.25
per share, as a finder's fee under the terms of the Company's agreement with Bay
Tree Associates. Bay Tree was to receive an additional 20,000 Common Stock
Purchase Warrants at an exercise price of $2.25 per share, which have not been
issued, and the Company does not intend to issue, based on its claim of
non-performance by the underwriter. As at the date of this Report, no claim for
this consideration has been made by Bay Tree Associates.
On May 8, 1996, the Company won six PCS licenses. The total winning
bids amounted to $26,452,200, after the 25% discount provided to small business
which the Company qualifies for, under the terms of the Auction. The Company has
deposited $2,645,220 with the FCC which equals 10% of the cost of the licenses.
Subsequently, on October 7, 1996, the Company entered into an agreement
with Emerging Technologies Inc. ("EGT") for consulting, investment banking,
financial planning and strategy, and business introduction services, for
purposes of, among other things, introducing the Company to various third-party
strategic partners. Management believed that it could not have obtained these
services and introductions without the assistance of EGT, and believes that EGT,
through the unique contacts and resources of its principals, valuable business
contacts and resources which could substantially assist the Company in its long
and short term goals. Accordingly, in the absence of adequate capital, and
unable to negotiate an alternative which management considered as adequate, the
Company consented to EGT's demand for the immediate transfer of 10% of PCN's
authorized and outstanding common stock, its sole class of stock, although some
of the services were prospective in nature.
TCI was recently formed to engage in the radio paging business. Prior
the Company's acquisition of a 51% ownership interest in TCI, TCI had acquired a
paging subscriber base, associated paging hardware and a paging carrier
agreement with Skytel, a company that provides nationwide paging, voice
messaging and related messaging services to subscribers and others. In addition,
TCI then owned a 900 megahertz FCC paging license in the Paging Service Area and
holds a long-term lease for a paging transmission site. Joseph P. Albanese, Sr.,
the founder of TCI, arranged for the acquisition of a paging transmission site
in West Orange, New Jersey, the proximity of which to certain telephone company
switching facilities represented substantial economies of scale if incorporated
into the Company's business, and arranged for the purchase of a 2,000 customer
base from Skytel. After the Company was unsuccessful, Mr. Albanese was able to
consummate a transaction for the purchase of General Communications and
Electronics, Inc., at a substantially reduced aggregate compensation than was
discussed by the Company in its failed bid to acquire General Communications,
and its valuable FCC 900 MHz Paging License.
To facilitate his efforts to accomplish the acquisition of General
Communications, in circumstances where such assets and facilities were of
significant benefit to the Company, the Company made certain loans to TCI, and
guaranteed certain obligations of TCI, in connection with
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its acquisition of General Communications, and its General Towers subsidiary,
as part of its indirect efforts to acquire General Communications and certain
operating assets of TCI. Based on certain written agreements and pledges and
the modification of prior agreements and arrangements, Joseph Albanese and the
Company may be deemed to have stood as joint venture partners in securing and
effecting the purchase and transfer of substantially all of the assets of
General Communications and a majority interest in General Towers.
This arrangement was formalized and subsumed on June 28, 1996, when the
Company acquired a 51% interest in TCI, and incorporated TCI infrastructure in
the operation of Electrocomm's Paging Network.
On September 17, 1996, the FCC officially awarded the six PCS licenses
to the Company. In connection therewith, the Company entered into six separate
Installment Payment Plan Notes ("Plan Notes") with the FCC in the aggregate
amount of $23,807,010. Interest only is due commencing December 31, 1996, with
the first payment of $479,400.84 and subsequent payments in equal consecutive
quarterly installments of $416,622.16 ($1,666,488.64 annually) until September
30, 2002. Commencing December 31, 2002, the Company shall pay principal and
interest in equal quarterly installments of $1,718,853.88 ($6,875,415.52
annually) until September 30, 2006 ("Maturity Date").
The entire unpaid Principal Amount, together with accrued and unpaid
interest on the Plan Notes and all remaining obligations thereunder, shall be
due and payable on the Maturity Date.
On September 20, 1996, the Company entered into a loan agreement with
the Marrotta Group (the "Lender"), pursuant to which the Company borrowed
$500,000. This loan, which was obtained to provide the Company with the ability
to meet its additional shortfalls on a further deposit with the FCC, was
arranged by Robert DePalo, a director, pursuant to a personal and business
relationship with the Marrotta Group, and one or more of its principal
shareholders. The loan bears interest at the rate of 10% per annum, and becomes
due and payable on or before June 20, 1997; however, the Company may request an
automatic three (3) month extension on the due date. As additional consideration
for making the loan, the Company agreed to issue to Marrotta 200,000 shares of
the Company's Common Stock, and 400,000 Class A Warrants, with Demand and
Piggyback Registration rights.
On September 4, 1996, the Company entered into a Client Service
Agreement with Great Deals, Inc. ("Great Deals"). Pursuant to the terms of this
agreement, Great Deals was hired as a financial public relations consultant, to
promote the Company's business and status to the financial community. The term
of the agreement is for two years. In consideration of the services to be
performed by Great Deals, the Company issued 2,300,000 shares of the Company's
common stock to Great Deals, and registered these shares on an S-8 registration
statement.
On October 9, 1996, the Company entered into a loan with Robert DePalo,
a Director of the Company, pursuant to which the Company borrowed $180,000. This
loan bears interest at the rate of 10% per annum. The loan is due upon three
days written demand. The Company used the proceeds of this loan for general
corporate purposes. Mr. DePalo loaned the Company the additional sum of $20,000
on or about March 3, 1997, which loan bears interest at 10% per annum and is
payable on demand.
Each of Messrs. Taylor and Winder and Brenda Taylor have agreed to
defer their respective recent increases in salary until the Company's cash flow
improves. Additionally, due to cash flow shortfalls, each of Messrs. Taylor,
Winder, DePalo and Brenda Taylor, at various times, deferred payment of their
salary beginning in November, 1996. Decisions to reinstate such amounts lie
within the discretion of such individuals as Management of the Company. (See
"Management.")
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Pursuant to the terms of the Private Placement Memorandum (the
"Memorandum"), dated December 6, 1996, the Company offered for sale a Maximum of
2,200,000 and a Minimum of 700,000 Units (the "Units"), at a price of $1.50 per
Unit (the "Offering"). Each Unit consists of one (1) share of ECC Common Stock,
and one and one-half (1 1/2) Class A Warrants, entitling the purchaser, as
holder of each full Class A Warrant to purchase one (1) additional share of
Common Stock, at $5.00 per share, at any time prior to May 12, 1999, subject to
prior redemption by the Company. The conversion price of each Class A Warrant
was subsequently reduced to $2.25 per share. The Class A Warrants may be
exercised and converted commencing one-hundred and eighty (180) days after the
last sale of a Unit pursuant to this Offering (the "Exercise Hold Period"), upon
written notice received by the Company from fifty (50%) percent, or more, of the
Purchasers of Units who are then holders.
As at March 21, 1997, the Company had received subscriptions for more
than the Minimum, but less than the Maximum Offering. The Offering was to end on
January 31, 1997, but has been extended.
The Offering is being made pursuant to an exemption from the
registration requirements of Section "5" of the Securities Act of 1933, as
amended (the "Act"), set forth in Rule 506 of Regulation D, promulgated under
the Act, only to persons who are "Accredited Investors" as defined in Rule
501(a) of Regulation D. No subscriptions will be accepted from non-U.S.
citizens, or from U.S. corporations controlled by non-U.S. citizens or persons.
Purchasers who are holders of the Units issued in connection with the
Offering will also be entitled to certain "Demand" Registration Rights with
respect to the Common Stock and Class A Warrants underlying the Units, entitling
purchasers, as holders, under certain circumstances, to require the Company to
effect the registration of their Common Stock and Class A Warrants under the
Act. The Demand Registration Rights shall require the Company to effect a
Registration to the extent that a "Notice of Demand Registration" is timely
received by the Company from a majority of the holders of the Units at any time
from and after the Exercise Hold Period, and extending for a period of five
hundred and forty-five (545) days thereafter (approximately eighteen (18)
months) (the "Registration Rights Period"). Such Holders shall also be entitled
to require the Company to include the shares of Common Stock and Class A
Warrants purchased hereunder in any Registration Statement filed by the Company
during the Registration Rights Period upon timely delivery to the Company of a
"Notice of Election of Piggyback Registration." The "Demand" and "Piggyback"
Registration Rights are subject to the prior redemption of the Class A Warrants
by the Company on twenty-five (25) days prior written notice to the record
owners of the Units, which may be given at any time that the Company's Common
Stock trades at a bid price of $8.00 per share or more for thirty (30)
consecutive days up to ten (10) days before the giving of such Notice.
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The following table presents the Company's estimate of its anticipated
expenditures, revenue and cash flow and the application of the "Net Offering
Proceeds" of the Offering as set forth in the Memorandum, which may vary
substantially from actual results. In particular, the below table reflects
payments anticipated to be made from the proceeds of the Offering to each of
Messrs. Taylor, Winder & DePalo, officers and directors of the Company, in
repayment of certain loans (see fn. "3").:
Approximate Approximate Percentage
Amount1 of Net Proceeds
----------- ----------------------
Payment of Notes Issued in Payment of
Deferred Portion of PCS Licenses2.... $1,729,267 58.88%
Purchase of Inventory and Promotional
Expenses for Paging Services Business $ 175,0000 5.96%
Advertising Costs for Paging and
Retail and Wholesale Cellular Business $ 87,500 2.98%
Legal, Accounting, and Filing Fees, and Other
Costs and Expenses Incident to Offering $ 118,000 4.02%
Working Capital3...................... $ 827,233 28.17%
---------- ------
Total $2,937,000 100.00%
---------- ------
---------- ------
(1) Assuming only the Minimum Offering, the Company anticipates receiving
$934,500 in gross proceeds, net of commissions to Placement Agents.
This would not leave sufficient net proceeds to ensure payment of the
next two (2) quarterly payments on account of the FCC Notes; and
expenditures for inventory and advertising would not be possible,
other than from the cash flow of the Company or another financing or
other source.
(2) To pay the quarterly installments due of the FCC Notes for the four
quarters ended December 31, 1996, March 31, June 30 and September 30,
1997. The Company's successful bid for the Licenses was $26,452,200.
An aggregate of $2,645,220 was deposited with the FCC. The Company
issued and delivered to the FCC its promissory notes in the aggregate
amount of $23,807,001.00 payable in quarterly interest installments
of $416,622.16, for six years, with quarterly principal and interest
payments thereafter for the 10 year term of the FCC Notes. The
December 31, 1996 installment is approximately fifteen (15%) percent
higher than the quarterly installments due for the next six (6) years
to cover additional interest payments between the date of license
grant of September 17, 1996 and September 30, 1996.
(3) It was contemplated that the Company would retire certain short-term
debt to certain third parties who, or which, assisted the Company in
meeting deposit requirements imposed by the FCC, or otherwise.
Assuming the Maximum Offering, and the Company's ability to
restructure or defer certain obligations, working capital shall be
applied to retire all or a substantial part of such indebtedness as
follows: The Marrotta Group, $500,000; Technics in Design, $110,000;
Strategic Marketing Int'l, Inc., $200,000; William S. Taylor,
$55,000; Les Winder, $22,000; and Robert DePalo, $110,000. To the
extent that there is insufficient working capital, the Company may
pay such loans pro rata. Such applications will substantially exhaust
Working Capital from this Offering.
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The following table (See corresponding footnotes to table of Security
Ownership at Item 11) sets forth, as of April 21, 1996, the number and
percentage of shares of Common Stock of the Company, owned of record and
beneficially by each officer and director of the Company prior to the
Consummation of the Offering, and reflects the dilution which would result if
the Offering were closed at the maximum amount offered.
Number of Shares Percentage of Percentage of
Name and Address of of Common Stock Class Before Class After
Beneficial Owner Beneficially Owned Offering Offering
- ------------------- ------------------ ------------- -------------
William S. Taylor...... 2,676,750 10.95% 8.94%
10 Plog Road
Fairfield, NJ 07004
Les Winder............. 2,066,750 8.45% 6.9%
10 Plog Road
Fairfield, NJ 07004
Brenda Taylor.......... 2,323,500 9.5% 7.76%
10 Plog Road
Fairfield, NJ 07004
Robert DePalo.......... 1,975,000 8.0% 6.5%
10 Plog Road
Fairfield, NJ 07004
Mal Gurian............. 120,000 .5% .4%
14 Old Farmstead Road
Chester, NJ 07930
Ira J. Tabankin........ 30,000 .125% .1%
1851 N.W. 150th Court
Clive, IA 50325
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
The following Exhibits are filed as part of this report. Where such
filing is made by incorporation by reference to a previously filed statement or
report, such statement or report is identified by footnote:
OFFICIAL
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
--- ----------- --------
1.3 Form of Financial Consulting Agreement................... Exhibit 1.3(1)
2.1 Stock Purchase Agreement between the Company and
shareholders of Free Trade Distributors, Inc. and Trade
Zone Distributors, Inc. dated February 1, 1994........... Exhibit 2.0(2)
3.1 Articles of Incorporation................................ Exhibit 3.0(2)
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OFFICIAL
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
--- ----------- --------
3.2 Certificate of Amendment to the Certificate of
Incorporation dated January 31, 1994..................... Exhibit 3.1(2)
3.3 Certificate of Amendment to the Certificate of
Incorporation dated April 5, 1994........................ Exhibit 3.2(2)
3.4 Certificate of Amendment to the Certificate of
Incorporation dated November 21, 1994.................... Exhibit 3.4(3)
3.5 Certificate of Designation of Series A Preferred Stock
dated November 29, 1994.................................. Exhibit 3.5(3)
3.6 Bylaws of the Registrant................................. Exhibit 3.3(2)
3.7 Certificate of Amendment to the Certificate of
Incorporation dated March 13, 1996....................... Exhibit 3.7(4)
4.1 Form of Common Stock Certificate......................... Exhibit 4.1(1)
4.2 Form of Warrant Certificate.............................. Exhibit 4.2(1)
4.3 Form of Warrant Agreement................................ Exhibit 4.3(1)
4.4 Form of Series B Common Stock Purchase Warrant issued to
Affiliates............................................... Exhibit 4.3(3)
4.5 Form of Underwriter's Purchase Option Agreement.......... Exhibit 4.9(1)
10.1 Lease covering Registrant's offices and warehouse between
Richards and Robbins Group & Free Trade Distributors, Inc.
dated May 20, 1994....................................... Exhibit 10.0(2)
10.2 Authorized Agency Agreement between New York Cellular
Geographic Service Area, Inc. and Trade Zone Distributors,
Inc. dated November 1, 1993.............................. Exhibit 10.2(2)
10.3 Letter amending NYNEX Agreement dated September 1, 1994.. Exhibit 10.3(3)
10.4 Letter of Intent between Bell Atlantic and Trade
Distributors, Inc. dated June 1, 1994.................... Exhibit 10.4(3)
10.5 1994 Stock Option Plan................................... Exhibit 10.9(3)
10.6 Employment Agreement between Registrant and William S.
Taylor dated November 15, 1994........................... Exhibit 10.10(3)
10.7 Bell Atlantic Authorized Agency Agreement for Cellular
Radio Service for Trade Zone Distributors, Inc. dated
February 10, 1995........................................ Exhibit 10.13(5)
10.8 Promissory Note between the Registrant and Metropolitan
State Bank dated April 18, 1995.......................... Exhibit 10.14(6)
10.9 Security Agreement between the Registrant and Metropolitan
State Bank dated April 18, 1995.......................... Exhibit 10.15(6)
10.10 Guaranty between Free Trade Distributors, Inc. and
Metropolitan State Bank dated April 18, 1995............. Exhibit 10.16(6)
10.11 Guaranty between William S. Taylor and Metropolitan State
Bank dated April 18, 1995................................ Exhibit 10.17(6)
10.12 Secured Note between the Registrant and Sterling National Bank
dated December 22, 1995.................................. Exhibit 10.18(4)
10.13 Hypothecation and Security Agreement between William S.
Taylor and Sterling National Bank dated November 27, 1995 Exhibit 10.19(4)
10.14 Hypothecation and Security Agreement between Les Winder
and Sterling National Bank dated November 27, 1995....... Exhibit 10.20(4)
77
<PAGE>
OFFICIAL
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
--- ----------- --------
10.15 General Loan and Security Agreement between the Registrant
and Sterling National Bank dated November 27, 1995....... Exhibit 10.21(4)
10.16 Guaranty between William S. Taylor and Sterling National
Bank dated November 22, 1995............................. Exhibit 10.22(4)
10.17 Guaranty between Les Winder and Sterling National Bank dated
November 22, 1995........................................ Exhibit 10.23(4)
10.18 Guaranty between Robert DePalo and Sterling National Bank
dated November 22, 1996.................................. Exhibit 10.24(4)
10.19 Loan Agreement between the Registrant and Technics In
Design & Manufacturing, Inc. dated February 29, 1996..... Exhibit 10.25(4)
10.20 Promissory Note between the Registrant and Technics In
Design & Manufacturing, Inc. dated February 29, 1996..... Exhibit 10.26(4)
10.21 Form of Employment Agreement between the Registrant and
Les Winder............................................... Exhibit 10.27(4)
10.22 Form of Extension Agreement between the Registrant and Les
Winder................................................... Exhibit 10.28(4)
11 Statement re: Computation of per share earnings (see Notes
to Consolidated Financial Statement).....................
21 Subsidiaries of Registrant............................... Exhibit 21(1)
4.2 Form of Warrant Certificate.............................. (1)
4.3 Form of Warrant Agreement................................ (2)
4.4 Amendment to Warrant Agreement........................... (4)
5.1 Opinion of Sommer & Schneider, LLP including consent..... (3)
23.1 Consent of Stetz, Belgiovine CPAs, P.C................... (4)
23.2 Consent of Sommer & Scheider, LLP (included in
Exhibit 5.1)............................................. (3)
24 Power of Attorney........................................ (5)
99.1 Loan Agreement between the Company and Strategic
Marketing, Int'l Inc. dated October 21, 1996............. (6)
99.2 Loan Agreement between the Company and Marrotta Group dated
September 20, 1996....................................... (6)
- ---------------------
(1) Incorporated by reference to Registration Statement on Form SB-2 (File No.
33-89336)
(2) Incorporated by reference to Registration Statement on Form 10-SB (File
No. 0-24486)
(3) Incorporated by reference to Amendment No. 2 to Registration Statement on
Form 10-SB (File No. 0-24486)
(4) Incorporated by reference to Annual Report on Form 10-KSB (File No.
0-24486)
(5) Incorporated by reference to Amendment No. 1 to Registration Statement on
Form SB-2 (File No. 33-89336)
(6) Incorporated by reference to Amendment No. 2 to Registration Statement on
Form SB-2 (File No. 33-89336)
(7) Incorporated by reference to Amendment No. 1 to Registration Statement on
Form SB-2 (File No. 33-89336).
78
<PAGE>
(8) Incorporated by reference to initial Registration Statement on Form SB-2
(File No. 33-89336).
(9) Filed as part of Amendment No. 2 to Registration Statement on Form S-3
(File No. 333-4778).
(10) Filed as part of Amendment No. 4 to Registration Statement on Form S-3
(File No. 333-4778).
(11) Filed as part of the initial filing of Registration Statement on Form S-3
(File No. 333-4778).
(12) Filed as part of Amendment No. 3 to Registration Statement on Form S-3
(File No. 333-4778).
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended December
31, 1996.
79
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed by
the undersigned, thereunto duly authorized.
Dated: March 27, 1997
Electronics Communications Corp.
By:s/---------------------
William S. Taylor
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed on behalf of the Registrant and in capacities and at
the dates indicated:
SIGNATURE CAPACITY DATE
--------- -------- ----
s/--------------- Chairman of the Board, Chief Executive March 27, 1997
William S. Taylor Officer, President (Principal Executive
and Financial Officer)
s/--------------- Executive Vice President, Treasurer and March 27, 1997
Les Winder Director
s/--------------- Director and Secretary March 27, 1997
Brenda Taylor
s/--------------- Controller March 27, 1997
Andrew A. Miller
s/--------------- Director March 27, 1997
Mal Gurian
s/--------------- Director March 27, 1997
Robert DePalo
s/--------------- Director March 27, 1997
Ira J. Tabankin
80
