<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended March 31, 1997 Commission File No. 1-13764
ELECTRONICS COMMUNICATIONS CORP.
(Exact name of Registrant as specified in its Charter)
Delaware 11-2649088
(State of Incorporation) (IRS Employer Identification No.)
10 Plog Road, Fairfield, New Jersey 07004
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code: (201) 808-8862
Former name, former address and former fiscal year, if changed since last
report: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for a shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [ X ] No [ ]
As of May 16, 1997, there were 14,097,515 shares of Common Stock, $.05 par value
issued and outstanding.
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
-------------- ---------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash...................................................... $ 48,620 $ 179,188
Accounts Receivable
(Net of $504,000 Allowance for Doubtful
Accounts at March 31, 1997 and $574,910 at December 31,
1996.)................................................... 685,709 676,797
Inventories............................................... 256,698 187,953
Loan Receivable........................................... 114,560 114,560
Proposed Service Contract................................. 1,027,911 1,205,137
Prepaid Expenses.......................................... 6,158 12,162
-------------- ---------------
TOTAL CURRENT ASSETS................... 2,139,656 2,375,797
-------------- ---------------
PROPERTY AND EQUIPMENT
Property and Equipment.................................... 2,794,870 2,754,910
Accumulated Depreciation.................................. (778,502) (634,314)
-------------- ---------------
NET PROPERTY AND EQUIPMENT........................ 2,016,368 2,120,596
-------------- ---------------
OTHER ASSETS
PCS Licenses.............................................. 26,452,200 26,452,200
Deferred Interest......................................... 910,023 479,401
Loan Origination Fees..................................... 287,876 808,287
Paging Carrier Agreement.................................. 962,835 980,022
Deferred Private Placements Costs......................... 347,971 237,243
Deferred License Costs.................................... 366,650 335,932
Security Deposits and Other Assets........................ 126,945 160,795
Goodwill.................................................. 63,459 66,202
Deferred Registration Costs............................... 84,176 84,176
Deferred PCS Costs........................................ 19,050 --
-------------- ---------------
TOTAL OTHER ASSETS..................... 29,623,185 29,604,258
-------------- ---------------
TOTAL ASSETS..................... $ 33,779,209 $ 34,100,651
-------------- ---------------
-------------- ---------------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
-------------- ---------------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES
Accounts Payable.......................................... $ 1,971,849 $ 1,956,329
Notes Payable--Other...................................... 941,949 1,081,538
Notes Payable--Bank....................................... 95,000 95,000
Notes Payable--Stockholders............................... 92,215 181,677
Current Portion of Obligations Under Capital Leases....... 234,885 234,885
Current Portion of Long Term Debt......................... 8,793 8,793
Private Placement Advance................................. 1,628,254 500,000
Accrued Expenses.......................................... 1,002,617 552,005
Accrued Interest.......................................... 607,429 493,401
Customer Deposits......................................... 23,929 24,009
-------------- ---------------
TOTAL CURRENT LIABILITIES.................. 6,606,920 5,127,637
-------------- ---------------
LONG TERM LIABILITIES
Notes Payable............................................. 23,806,980 23,806,980
Long Term Debt............................................ 41,879 43,971
Obligations under Capital Leases.......................... 682,377 745,639
-------------- ---------------
TOTAL LONG TERM LIABILITIES................................. 24,531,236 24,596,590
-------------- ---------------
Minority Interest........................................... 424,542 415,474
STOCKHOLDERS' EQUITY
Preferred Stock, par value $.01 per share, 8,000,000
authorized, 4,000,000 Series B Non-Voting
Convertible Shares issued outstanding at March 31, 1997
and December 31, 1996, respectively...................... 40,000 40,000
Common Stock, par value $.05 per share, 40,000,000
authorized, 12,189,174 issued and outstanding at March 31,
1997 and 3,082,318 at December 31, 1996................. 609,460 609,460
Additional Paid-In Capital................................ 18,295,820 18,295,820
Retained (Deficit)........................................ (10,723,068) 8,978,629
Subscription Receivable................................... (6,000,000) (6,000,000)
Notes Receivable arising from Common Stock Purchase
Warrants Sold............................................ (5,701) (5,701)
-------------- ---------------
TOTAL STOCKHOLDERS' EQUITY................. 2,216,511 3,960,950
-------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $ 33,779,209 $ 34,100,651
-------------- ---------------
-------------- ---------------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED (DEFICIT)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
<S> <C> <C>
1997 1996
------------- -------------
SALES
Electronics................................................... $ 76,115 $ 983,728
Commissions................................................... 227,732 1,279,798
Paging & Two Way Radio........................................ 561,441 --
------------- -------------
TOTAL SALES.................... 865,288 2,263,526
COST OF SALES
Electronics................................................... 74,593 827,816
Commissions................................................... 282,217 889,435
Paging & Two Way Radio........................................ 361,296 --
------------- -------------
TOTAL COST OF SALES.................. 718,106 1,717,251
GROSS PROFIT...................... 147,182 546,275
EXPENSES
Selling....................................................... 303,323 134,128
General and Administrative.................................... 1,530,309 422,746
------------- -------------
TOTAL EXPENSES.................... 1,833,632 556,874
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OPERATING INCOME BEFORE OTHER INCOME, OTHER EXPENSES AND INCOME
TAXES........................................................... (1,686,450) (10,599)
------------- -------------
OTHER INCOME
Minority Interest in Loss of Consolidated Subsidiaries.......... (1,661) --
Interest Income................................................. 2,964 --
------------- -------------
TOTAL OTHER INCOME.............................................. 1,303 --
OTHER EXPENSES
Interest Expense................................................ 59,292 23,762
Settlement of Potential Litigation.............................. -- 73,769
------------- -------------
TOTAL OTHER EXPENSES.................. 59,292 97,531
------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES............................... (1,744,439) (108,130)
Income Taxes.................................................... -- --
------------- -------------
NET INCOME (LOSS)............................................... ($ 1,744,439) ($ 108,130)
RETAINED (DEFICIT), BEGINNING OF PERIOD......................... ($ 8,978,629) ($ 2,947,539)
------------- -------------
------------- -------------
RETAINED (DEFICIT), END OF PERIOD............................... ($ 10,723,068) ($ 3,055,669)
------------- -------------
------------- -------------
LOSS PER COMMON SHARE........................................... ($ 0.14) ($ 0.04)
------------- -------------
------------- -------------
AVERAGE COMMON SHARES OUTSTANDING (NOTE 11)..................... 12,189,174 3,082,318
------------- -------------
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</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
<S> <C> <C>
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss)................................................ ($ 1,744,439) ($ 108,130)
Adjustments to Reconcile Net Income (Loss)
Net Cash Used By Operations:
Depreciation and Amortization.................................... 680,278 46,557
Provision for Doubtful Accounts.................................. (70,910) --
Non Cash Other Expense........................................... -- 73,769
Minority Interest in Loss........................................ (9,068) --
Changes in:
Accounts Receivable.............................................. (8,912) 928,392
Inventories...................................................... (68,745) (73,303)
Prepayments...................................................... 183,230 (3,739)
Accounts Payable................................................. 15,520 (509,166)
Accrued Expenses and Taxes Payable............................... 450,625 138,515
Accrued Interest................................................. 114,028 --
Customer Deposits................................................ (80) --
------------- ----------
TOTAL ADJUSTMENTS.............................................. 1,285,966 601,025
------------- ----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES................... (458,473) 492,895
------------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Loan Receivable.................................................. -- (564,000)
Other Assets..................................................... 45,289 (60,882)
Deferred License Costs........................................... (461,340) (12,600)
Deferred PCS Costs............................................... (19,050) --
Deferred Private Placement Costs................................. (110,803) (138,357)
Additions to Property and Equipment.............................. 39,960 (86,639)
------------- ----------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES................... (505,944) (862,478)
------------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Proceeds (Payments) of Shareholder Loans..................... (89,462) (24,759)
Deferred Costs in Connection with Public Offering................ -- --
Private Placement Advance........................................ 1,128,254 --
Payments of Bank Loans........................................... -- (65,000)
Proceeds of Other Loans.......................................... -- 134,000
Payments of Other Loans.......................................... (141,681) (23,000)
Principal Payments of Capital Lease Obligations.................. (63,262) (4,329)
Sale of Common Stock............................................. -- 389,000
------------- ----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES................... 833,849 405,912
------------- ----------
NET INCREASE (DECREASE) IN CASH.................................... (130,568) 36,329
CASH, BEGINNING OF PERIODS......................................... 179,188 18,000
------------- ----------
CASH, END OF PERIODS............................................... $ 48,620 $ 54,329
------------- ----------
------------- ----------
SUPPLEMENTAL DISCLOSURE FOR CASH FLOWS CASH PAID DURING THE
PERIOD FOR:
Interest.......................................................... 59,292 23,762
Taxes............................................................. --
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Property Acquired Under Capital Lease............................. -- ($ 32,258)
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BUSINESS ACTIVITY AND BASIS OF PRESENTATION
During 1994, Electronics Communications Corp. (the "Company") changed its
name from Genetic Breeding, Inc. to Internow Affiliates, Inc. and then to
Electronics Communications Corp. Effective on January 1, 1994, the Company
acquired Free Trade Distributors, Inc. (which engages in the wholesale
distribution of cellular telephones and related accessories and electronic
products) and Trade Zone Distributors, Inc. (which engages in the activation of
cellular radio subscribers for commissions, both serving the New York
Metropolitan Area) in 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.)
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and
Article 10 of Regulation S-X. Accordingly, they do not necessarily include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three months ended March 31, 1997 are not necessarily
indicative of the results that may be expected for the year ended
December 31, 1997. The unaudited consolidated financial statements should be
read in conjunction with the consolidated financial statements and footnotes
thereto included in the Company's annual report on form 10-SB for the year
ended December 31, 1996.
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued)
(B) Principles of Consolidation
The consolidated financial statements include the accounts of Electronics
Communications Corp., subsequent to the Acquisition, and its wholly-owned
subsidiaries, Free Trade Distributors, Inc., Trade Zone Distributors, Inc.
(Trade Zone Distributors , Inc. has a wholly owned subsidiary, Trade Zone
Distributors, II, Inc. which is an inactive, non-operating entity),
Electrocomm Wireless, Inc., and 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 quarter ended
March 31, 1997 and 1996 was $149,608 and $10,939, 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 9% and 43% of the Company's total revenue
for the quarter ended March 31, 1997 and 1996 respectively. Commissions are
inclusive of fees earned for the sale of cellular radio service contracts and
residuals received on those contracts. Revenues and related commissions from the
sale of the service contracts are recognized at the point of activation.
Revenues from residuals are realized when approved by the cellular radio service
supplier and are paid on customer usage for a maximum of three years. Commission
revenue represented 26% and 57% of the Company's total revenue for the quarter
ended March 31, 1997 and 1996 respectively. The Company establishes a reserve of
3.5% for charge-backs on customers that prematurely terminate cellular service.
In addition to the commissions paid by the cellular radio supplier, the Company
receives co-op fees. Co-op fees are reimbursements of expenditures that are
approved by the cellular radio supplier for advertising and promotion in
connection with the sale of cellular radio contracts. Revenues from radio paging
and two way radio services are recognized in the beginning of the month for
which they are invoiced and amounted to 65% of revenues in the quarter ended,
March 31, 1997.
(F) Concentration of Credit Risk
The Company maintains its major cash accounts in banks in the New York and
New Jersey Area. The total cash deposits are insured by the Federal Deposit
Insurance Corporation up to $100,000 per account.
The Company currently receives all of its commission revenue from two major
cellular radio carriers. Although there are a limited number of sources for this
type of revenue, management believes that other sources could provide similar
commissions on comparable terms. A change in carriers could cause a delay in
activations and a loss of sales which would affect operating results adversely.
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(G) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
period. Actual results could differ from those estimates.
(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 March 31, 1997, 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.
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--ACQUISITION, RECAPITALIZATION AND PUBLIC OFFERING--(Continued)
(B) On May 12, 1995 the Company successfully completed a public offering
(the "Offering"). The Company sold 1,000,000 shares of Common Stock and
2,000,000 Common Stock Purchase Warrants at an initial offering price of
$5.00 per share and $.10 per Warrant. In order to complete this transaction
the Board approved a 1 for 5 reverse common stock split, in order to reduce
the authorized Common Stock from 42,000,000 shares to 8,400,000 shares and
increase the par value of the shares from $.01 to $.05. The Company also
registered 1,000,000 shares of common stock owned by certain officers,
directors and stockholders. In addition, the Company granted the Underwriter
an option to purchase up to 100,000 shares of Common Stock and 200,000 Common
Stock Purchase Warrants. On September 12, 1995 the Underwriter exercised the
over-allotment option to purchase an additional 300,000 warrants. All
references in the financial statements to average number of shares
outstanding, per share amounts and stock option plan data have been restated
to reflect the reverse common stock split.
(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 a aggregate of 34,715 additional shares to the
subscribers. The additional cost of these shares issued were treated as an
increase of additional paid-in capital and expensed as a settlement of potential
litigation.
(D) On March 21, 1996, the Company entered into a letter of intent with an
investment banking firm (the "Placement Agent"), pursuant to which the Company
will offer $6,000,000 principal amount of the Company's Subordinated Convertible
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.
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--ACQUISITION, RECAPITALIZATION AND PUBLIC OFFERING--(CONTINUED)
(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 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. As of
March 31, 1997 the Company had 1,205,137, prepaid with respect to this contract.
(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 $742,100 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 $247,500 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,
offered 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.
The Company subsequently determined to reduce the per Unit offering price
to Investors from $1.50 to $1.00 per Unit, while maintaining the maximum
offering at $3,300,000. The Offering was extended to May 31, 1997. Upon
final closing, the Company received gross offering proceeds in the sum of
$1,902,000, upon its acceptance of subscription for the purchase of 1,902,000
units, representing the sale of 1,902,000 shares of common stock and
2,853,000 warrants to purchase common stock.
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 $670,606
for the sale of electronic goods, $158,958 for commissions, and $360,145 for the
sale of radio paging and two way radio service at March 31, 1997 and $758,088,
$240,908 and $252,711 at December 31, 1996.
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
(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. Capitalized PCS interest in the
amount of $910,023 represents interest capitalized in conjunction with these
licenses. 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 March 31, 1997 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
NOTES PAYABLE CONSIST OF THE FOLLOWING:
(A) Notes Payable--Other in the amount of $5,000 at March 31, 1997, 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.
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7--NOTES PAYABLE-(CONTINUED)
(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%. 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 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. The note
was paid in 1997. As a result of this transaction, $500,000 in loan
origination fees were recognized, which were being amortized over the life of
the loan.
(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 Principal amount of this non interest bearing
note was $311,111 and $281,944 at December 31, 1996 and March 31, 1997,
respectively, less unamortized discount of $45,990 (discount is based on
interest of 12%) for a net balance of $265,121 and $235,955.
(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 was
partially paid on March 31, 1997. A default under this note ("Event of Default")
may 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 was $52,764 and $50,672, respectively, at December 31, 1996 and March 31,
1997.
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7--NOTES PAYABLE (CONTINUED)
(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 March 31, 1997 for each of the next five
years and in the aggregate are:
1997................................................... $ 260,470
1998................................................... 349,959
1999................................................... 298,975
2000................................................... 203,982
2001................................................... 55,797
---------
Total Minimum Lease Payments........................... 1,169,183
Less: Amount Representing Interest..................... (251,921)
---------
Present Value of Net...................................
Minimum Lease Payments................................. 917,262
Less: Current Maturities
included in Current Liabilities....................... (234,885)
---------
Long Term Obligations Under Capital Leases............. $ 682,377
---------
---------
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.
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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
carryforwards that it does not expect to utilize pursuant to Internal Revenue
Regulations.
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15--CONTINGENT LIABILITIES
(A) On December 1, 1994, the Company entered into an employment agreement
with the President of the Company for a term of five years with an option for
an additional three one year terms. The agreement provides for annual
compensation of $150,000 during the term of the employment agreement and
entitles the President to certain fringe benefits, including automobile
maintenance, disability insurance, medical benefits and life insurance
coverage. The President has agreed that during the term of his agreement and
for 12 months thereafter (unless the agreement is terminated without cause),
he will be subject to non-competition provisions. Upon termination of
employment without cause, the President will be entitled to a lump sum
payment of $75,000 multiplied by the number of years of his employment by the
Company.
(B) The Company has engaged a management company, which is an affiliate of
the Underwriter used in the Public Offering described in Note 2B, as the
Company's management consultant, for a period of 15 months commencing December
14, 1994, at a fee of $75,000 (exclusive of out-of-pocket expenses), which was
paid on May 12, 1995. In addition, the Company has agreed, subject to any
required regulatory approvals, to pay the Representative a finder's fee, in the
event that the Representative originates within five years following the
Effective Date of the Offering a merger, acquisition, joint venture or other
transaction to which the Company is party, in the amount equal to 5% of the
first $4,000,000, 4% of the next $1,000,000, 3% of the next $1,000,000 and 2% of
the excess, if any, over $6,000,000 of the consideration actually received by
the Company in any such transaction.
(C) On June 1, 1995, the Company entered into a consulting agreement with a
corporation owned by four of the Company's legal representatives for non-legal
services. In consideration for services performed by the consultant the Company
agreed to pay $144,000 per year for five years payable in monthly installments
of $12,000.
(D) On May 17, 1995, the Company entered into an employment agreement with
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
(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.
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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..................................................... $ 83,166
1998..................................................... 110,888
1999..................................................... 110,888
2000..................................................... 110,888
2001..................................................... 46,203
---------
Total Minimum Future Rental Payments..................... $ 462,033
---------
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 the quarter ended March 31, 1997 and
1996 was approximately $36,992 and $24,682 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 exercised under
the plan.
<PAGE>
ELECTRONICS COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 March 31, 1997 have
been prepared on a going concern basis, which contemplates the realization of
assets and settlement of liabilities and commitments in the normal course of
business. The Company has incurred net losses of $1,744,439 for the quarter
ended March 31, 1997 and $6,061,090 for the year ended December 31, 1996. The
Company has a working capital deficiency of $4,467,264 at March 31, 1997.
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.
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. 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 brief, and oral argument before the United States Court of Appeals
for the Second Circuit is scheduled for May 22, 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.
An additional claim has been asserted by a former supplier of the Company,
claiming that the Company owes it approximately $400,000 for merchandise
delivered. No formal action has commenced, although counsel have exchanged
letters. Counsel for the Company has advised the potential claimant that the
Company believes it has valid and compelling counterclaims which equal or exceed
such party's claims for payment. No assurance can be given that a settlement
will be achieved, or that litigation will not result.
<PAGE>
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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.
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
<PAGE>
In addition, "Proposal No. 3," 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.
ITEM 5. OTHER INFORMATION
The Company has consummated a "Settlement & Separation Agreement" severing
its agency relationships with NYNEX Mobile Communications, Inc. ("NYNEX") and
Bell Atlantic Mobile Communications, Inc. ("Bell Atlantic") with respect to
the solicitation of cellular activations. This was the Company's largest
source of commission and other income over the past twelve months. As part
of this arrangement, the Company agreed to settle its claims for commissions
due for the fixed sum of $95,000, net of NYNEX's and Bell Atlantic's
agreement to waive certain payables by the Company. In addition, as part of
the Settlement and Separation Agreement, Bell Atlantic and NYNEX have agreed
to release the Company from the restrictions of certain solicitation and
non-competition provisions contained in the Company's Agency Agreements with
NYNEX and Bell Atlantic, respectively, which provisions would have precluded
the Company from soliciting prior customers and from engaging in
solicitations of activations for Personal Communications Services ("PCS") in
the New York Metropolitan Area. The Company continues to believe that PCS is
the future of wireless communications. The Company has already entered into
various preliminary agreements with respect to soliciting activations for PCS,
and cellular activations on behalf of OmniPoint and AT&T (directly or through
various agents) in the New York Metropolitan Area. By virtue of these
arrangements, the Company believes that in the next several months it will be
able to replace most or all of its prior commission income derived from its
NYNEX and Bell Atlantic Agency Agreements. During this period, the Company
will continue to experience cash flow shortfalls. Neither of the OmniPoint,
nor the indirect AT&T arrangements, preclude the Company from other PCS
activities, including activation solicitations for others. Accordingly, the
Company will continue its efforts to build out and operate its own PCS
system, pursuant to its recently acquired FCC PCS Licenses, and to operate
and expand its proprietary paging system, in which capacities the Company
acts, or will act, as an FCC licensed carrier.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 20, 1997
ELECTRONICS COMMUNICATIONS CORP.
By: /s/ William S. Taylor
----------------------------
William S. Taylor, President
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