SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended MARCH 31, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the Transition period from_________________to________________
Commission File Number 0-24486
NORTHEAST DIGITAL NETWORKS, INC.
(FORMERLY ELECTRONICS COMMUNICATIONS CORP.)
[Exact name of small business issuer as specified in its charter]
DELAWARE 11-2649088
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[State or other jurisdiction of [IRS Employer
incorporation or organization] Identification Number]
425 Broadhollow Road
MELVILLE, NEW YORK 11747
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[Address of principal executive offices] [Zip Code]
Registrant's telephone number, including area code (516) 501-0466
Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of each exchange
TITLE OF EACH CLASS ON WHICH REGISTERED
COMMON STOCK, $.60 PAR VALUE NASDAQ/BOSTON STOCK EXCHANGE
CLASS A REDEEMABLE WARRANTS NASDAQ/BOSTON STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Exchange Act: NONE
Check whether the issuer [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
ninety days. YES X NO___
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
For the year ended March 31, 1998, the issuer's revenues were $2,335,838.
On June 9, 1998, the aggregate market value of the voting and non-voting common
equity of Northeast Digital Networks, Inc. (consisting of Common Stock, $.60 par
value) held by non-affiliates of the Issuer was approximately $3,025,000 based
upon the average of the closing bid and closing asked prices for such Common
Stock on said date in the over-the-counter market as reported by the National
Quotation Bureau, Inc. On such date, there were 8,447,104 shares of Common Stock
of the Issuer issued and outstanding.
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IN ADDITION TO STATEMENTS OF HISTORICAL FACT, THIS ANNUAL REPORT CONTAINS
FORWARD-LOOKING STATEMENTS REFLECTING THE COMPANY'S EXPECTATIONS OR BELIEFS
CONCERNING FUTURE EVENTS WHICH COULD MATERIALLY AFFECT THE COMPANY'S PERFORMANCE
IN THE FUTURE. THE COMPANY CAUTIONS THAT THESE AND SIMILAR STATEMENTS INVOLVE
RISKS NOTED IN THE COMPANY'S SEC FILINGS WHICH MAY CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY. SUCH RISKS INCLUDE THE POSSIBLE INABILITY OF THE COMPANY TO
RAISE ADDITIONAL FINANCING REQUIRED TO PAY THE PURCHASE PRICE FOR ITS PCS
LICENSES AND TO BUILD OUT ITS PLANNED PCS NETWORK. FORWARD-LOOKING STATEMENTS
ARE MADE IN THE CONTEXT OF INFORMATION AVAILABLE AS OF THE DATE STATED. THE
COMPANY UNDERTAKES NO OBLIGATION TO UPDATE OR REVISE SUCH STATEMENTS TO REFLECT
NEW CIRCUMSTANCES OR UNANTICIPATED EVENTS AS THEY OCCUR.
ITEM 1. DESCRIPTION OF BUSINESS.
BUSINESS OF THE COMPANY AND ITS SUBSIDIARIES
NORTHEAST DIGITAL NETWORKS, INC, formerly known as Electronics Communications
Corp., is a Delaware corporation formed in 1984 (the "Company"). The Company
principally carries on its business through two wholly owned subsidiaries,
Personal Communications Networks, Inc. ("PCN") and Threshold Communications,
Inc. ("TCI").
PCN was formed in 1995 for the purpose of bidding in the C-Block FCC auction for
the personal communications spectrum as a predicate to becoming a wireless
telecommunications carrier. PCN successfully bid for six 30 MHz broadband
licenses in three basic trading areas ("BTAs"), Vermont, Maine and New York,
with overlap of coverage into New Hampshire and Pennsylvania (the "PCN
Markets"). PCN paid an average of $17.80 per "POP," for over 1.5 million "POPs."
This compares favorably to the average auction price of $39.88 per "POP." In
June 1998, PCN elected the Disaggregation Option offered by the Federal
Communication Commission (the "FCC"), thus returning 15MHz of spectrum in each
of its BTAs and reducing its per POP cost to approximately $8.90. The PCN
Markets were selected for their regional footprint in the highly-valued
northeast corridor, the ability of such markets to be "linked" for contiguous
coverage, their strategic positioning and value to adjacent PCS networks.
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. The Company has decided to utilize the GSM
technology as the platform for PCN and in April 1998, joined the GSM Mou. The
Company is currently in negotiations with PCS infrastructure and equipment
vendors who will supply GSM equipment.
In 1996, the Company acquired fifty-one (51%) percent ownership in TCI, which,
in turn, owns General Communications and Electronics, Inc ("GCE") and 56.667% of
General Towers of America, Inc. ("GTA"). In January 1998, the Company acquired
the remaining 49% of TCI. GCE had been a reseller of paging airtime for more
than 25 years and supported approximately 7,500 active subscribers (primarily
corporate rather than individual retail customers). Upon the construction of a
900 MHz satellite-based Flex paging network manufactured by Glenayre put into
service in May 1997, TCI became a full-service paging carrier.
In May 1997 pursuant to a mutually agreed Settlement and Separation Agreement,
TZD severed its relationship with Bell Atlantic Nynex Mobile. As a result, the
Company no longer solicits cellular telephone activations and TZD's operations
have been discontinued.
In addition, due to a deteriorating and shrinking market for the distribution of
consumer electronic products based upon increased competition by large retailers
such as Circuit City, P.C. Richards and others serving in a dual capacity as
both a distributor and a retailer, the Company discontinued its FTD operations
effective October 1997.
DEVELOPMENTS SINCE THE BEGINNING OF THE LAST FISCAL YEAR
On August 18, 1997, the Company filed a current report on Form 8-K reporting a
change as of August 11, 1997 in its independent accountants from the firm of
Stetz, Belgiovine CPAs, P.C. to Wiss & Company, LLP, CPAs and reporting a change
in its fiscal year-end from December 31 to March 31. As a result, this report
relates to the Company's most recently completed fiscal year, the twelve month
period ended March 31, 1998.
At April 1, 1997 in addition to its PCN and TCI businesses, the Company was
engaged through its Trade Zone Distributors, Inc. ("TZD") subsidiary in
soliciting cellular telephone activations for Bell Atlantic Nynex Mobile and
through its Free Trade Zone Distributors, Inc. ("FTD") subsidiary in the
distribution of consumer electronic products including cellular telephones, fax
machines and copiers.
<PAGE>
The Company's Board of Directors authorized a one-for-twelve reverse stock split
of its Common Stock and an increase in the par value of its Common Stock from
$.05 to $.60 per share effective July 31, 1997. The change in par value and the
reverse stock split was ratified by stockholders at the May 28, 1998 special
meeting in lieu of annual meeting of stockholders. (See Item 4.) The Company's
outstanding Class A Warrants were appropriately adjusted. Unless otherwise
indicated, all share and per share information contained in this annual report
gives effect to the one-for-twelve reverse split of the Company's Common Stock
and the Common Stock exercise purchase prices for the Company's Class A
Warrants, Class B Warrants and stock options have been adjusted throughout this
annual report by multiplying the actual prices and/or exercise prices for
periods prior to July 31, 1997 by twelve. No assurance can be given that the
actual prices for the Common Stock during such pre-split periods would have
approximated such adjusted prices if the one-for-twelve stock split had been
effectuated at such times.
On October 8, 1997, the Company's three principal officers, William S. Taylor,
Les Winder and Mr. Taylor's mother, Brenda Taylor, resigned as officers and
directors of the Company and its subsidiaries. A fourth director, Ira Tabankin
also resigned. (A fifth director, Robert DePalo resigned in March 1998.) At
October 8, 1997, Joseph A. Rosio was elected chairman of the board, president
and chief executive officer of the Company and John Cassella was elected a
director. Christopher J. Garcia was elected a director of the Company as well as
treasurer, secretary and chief financial officer in the first quarter of
calendar 1998. As a result of these changes in management, the current directors
of the Company are Mr. Rosio, Mr. Cassella, Mr. Garcia and Mal Gurian (who has
served as a director since 1995) and the current executive officers of the
Company are Messrs. Rosio and Garcia.
See Notes 6 and 7 of the Notes to the Company's Consolidated Financial
Statements as to various private placements by the Company of debt and equity
securities during the fiscal year ended March 31, 1998 for working capital
purposes. Also see this Item 1 and Note 20 of the Notes to the Company's
Consolidated Financial Statements as to the Company's election on June 8, 1998
of the Disaggregation Option offered by the Federal Communications Commission
("FCC") with respect to the Company's PCS licenses thereby reducing the debt
incurred for the licenses from $23,806,980 to $11,903,490.
At the Company's Special Meeting in lieu of Annual Meeting of Stockholders held
on May 28, 1998, stockholders approved the change of the Company's name from
"Electronics Communications Corp." to "Northeast Digital Networks, Inc." See
Item 4.
PERSONAL COMMUNICATIONS NETWORK
STRATEGY
PCN's strategy for its PCS service business is to become the leading regional
provider of wireless services in its markets. PCN will build out its licenses
first in Vermont and Maine, then Elmira Corning, New York, focusing initially on
the most densely populated portions of these areas and on major commuting
corridors.
INDUSTRY BACKGROUND
Since 1983, the demand for wireless telecommunications services has grown
dramatically as cellular, paging and other emerging wireless communications
services have become widely available and increasingly affordable. This growth
in wireless services has been driven by technological advances and changes in
both telecommunications regulations and consumer preferences. Mobile cellular
telephone service has been one of the fastest growing market segments within the
telecommunications industry. According to cellular industry analysts' estimates,
the number of cellular, PCS, and ESMR users in the U.S. grew from 340,000 at the
end of 1985 to approximately 56 million by the end of 1997. According to such
estimates, there are now over 200 mobile wireless cellular users worldwide. Most
industry analysts forecast that U.S. penetration rates for mobile wireless
service will be significantly greater than 50% by 2005.
PERSONAL COMMUNICATIONS SERVICES (PCS)
PCS is defined by the FCC as "a family of mobile and portable radio
communications services for individuals and businesses that may be integrated
with a variety of competing networks." PCS is widely identified as the next
generation of wireless
<PAGE>
voice and data communications. PCS is designed to offer customers a broad range
of individualized digital wireless communications services including landline
telephone-quality voice communication for mobile, office, or home use, as well
as advanced features such as paging, e-mail and text messaging and news
services. PCS offers subscribers two basic services: (i) mobile service; and
(ii) fixed wireless replacement of local telephone services. With mobile
service, a subscriber carries a single, lightweight, long-battery-life telephone
that will accommodate any incoming or outgoing call almost anywhere in the
country.
PCS differs from existing cellular and SMR in three basic ways: frequency,
spectrum and geographic division. PCS networks operates in a higher-frequency
bank (1850-1990 MHz) compared to the cellular and SMR frequency (800-900 MHz).
The higher frequency band for PCS networks requires a greater number of total
cell sites to cover the same geographic area as existing cellular networks.
However, depending on the technology utilized, PCS service is ultimately less
expensive in certain geographic areas because of the lower cost and improved
capacity of the infrastructure equipment relative to cellular networks. In
addition, PCS is designed to provide improved voice quality and privacy. PCS is
comprised of 30 MHz and 10 MHz spectrum blocks, or combinations thereof, versus
25 MHz spectrum blocks for cellular networks. As a result of the improved
capacity of the infrastructure and comparatively large allocation of spectrum,
PCS has more capacity for new wireless services such as data and video
transmission.
Currently, cellular communication is the closest comparable service to PCS
available. Although analog cellular is the most widely deployed two-way wireless
service available in the U.S. today, it has several limitations including
inconsistent service quality, lack of privacy, limited capacity, and currently,
the inability to transfer data without a modem. Most current cellular services
transmit voice and data signals over analog-based systems, which use one
continuous electronic signal that varies in amplitude or frequency over a single
radio channel. Digital systems such as PCS, on the other hand, convert voice or
data signals into a stream of digits and typically use voice compression and
other techniques to allow a single radio channel to carry multiple simultaneous
signal transmissions. Digital technologies offer new services, improved system
flexibility, greater efficiency and increased capacity. Data transmission, call
forwarding, call waiting and paging capability are among the enhanced services
provided by PCS.
In order to gain early market penetration and compensate for initially limited
network footprints, PCS operators typically have been aggressive in terms of
pricing their service. This pricing strategy reflects the abundance of network
capacity provided by their recently commercialized digital networks. Moreover,
PCS providers have attracted subscribers by not requiring subscribers to sign
minimum service contracts and offering lower per minute incoming rates. PCS
providers have also aggressively promoted the differentiating characteristics
between digital and analog service including security, call quality and other
enhanced features.
PCS TECHNOLOGY
Although there are as many as seven versions of digital PCS technologies
competing for the domestic market, only three are commonly considered to be
viable alternatives for fully mobile communication services. The three
technologies include GSM, Code Division Multiple Access ("CDMA"), and U.S. Time
Division Multiple Access ("TDMA"). GSM and TDMA are both "time division-based"
standards but are incompatible with each other and CDMA.
GSM facilitates PCN's plan to rapidly build out its PCS systems. GSM is the
leading digital wireless technology in the world, with approximately 230
networks being built or operating in over 110 countries, including all of
western Europe. According to industry estimates, GSM networks served
approximately 70 million subscribers worldwide as of November 1997, and are
adding 2.5 million subscribers per month. In November 1997, the U.S. crossed the
one million GSM subscribers mark. American Personal Communications, Inc.
introduced the first GSM network in the U.S. in the Baltimore/Washington, D.C.
MTA in November 1995. In addition to the Baltimore/Washington, D.C., New York
and eastern Pennsylvania markets, GSM systems have been introduced in over 500
cities located throughout the United States. An important benefit associated
with GSM technology is its use of an open system architecture that will allow
operators to purchase network equipment from a variety of vendors that share
standard interfaces for operation. This open architecture provides PCS operators
with significant purchasing leverage with vendors and flexibility in
provisioning of features, products and services.
One competing standard, IS-95 CDMA, is a CDMA standard proposed as an upgrade
for existing U.S. analog cellular service to digital service. Qualcomm is the
primary proponent of IS-95 CDMA for PCS service. IS-95 has also received support
from Motorola, Lucent Technologies and Northern Telecom. IS-95's PCS service
supporters include Sprint PCS and the Bell Atlantic Mobile, US West and AirTouch
Communications Inc. consortium, PCS PrimeCo, L.P., both of which have deployed a
modified version of this technology at 1.9 GHz.
The other main competing standard, IS-54 TDMA, is the TDMA standard that several
cellular carriers are implementing as they upgrade to digital service. Primary
network suppliers are Lucent Technologies, Ericsson and Hughes. AT&T Wireless,
<PAGE>
SBC Communications, Inc. ("SBC") and parts of Bell south's cellular network are
the primary 800 MHz service supporters. AT&T Wireless and SBC have deployed
systems based on IS-54 at 1.9 GHz (the upgraded version at both frequencies is
known as IS-136 TDMA). IS-54/IS-136 TDMA, like PCS 1900, faces no major
technological hurdles in upbanding to 1.9 GHz PCS. Upbanded IS-54-9S-136 TDMA
equipment was launched at 1.9 GHz during 1997 in ten cities by AT&T Wireless.
SERVICE BUSINESS
PCN's PCS business will provide mobile and fixed communications service in its
markets. PCN's wireless service will provide private, secure and enhanced voice,
high-speed data, paging services and other capabilities for both the office
environment and outdoor mobile coverage with basic features including voice
mail, call forwarding and call waiting, and enhanced features such as
voice-activated dialing, news and weather reports and stock market quotes.
PCN will utilize GSM technology, the most widely used wireless protocol in the
world. As of November 1997, there were approximately 70 million subscribers,
growing at 2.5 million per month, in over 110 countries worldwide. In the U.S.,
extensive roaming arrangements under the GSM Alliance have been signed with
operators whose licenses, along with PCN, cover 90% of U.S. POPs.
PCS MARKETS
PCN has PCS licenses to provide wireless communications services in areas
covering approximately 1.5 million non-overlapping POPs. PCN's licenses include
C Block licenses for the following BTA's: Vermont-Burlington with approximately
369,000 POPS/Rutland-Bennington with approximately 98,000 POPs; Maine-Bangor
with approximately 317,000 POPs/Lewiston-Auburn with approximately 222,000 POPs,
Waterville-Augusta with approximately 166,000 POPs and Elmira-Corning-Hornell,
NY with approximately 315,000 POPs.
PCN's individual markets cover large contiguous areas in the Northeast United
States with attractive demographic characteristics including growing
populations, favorable commuting patterns, high household incomes and heavily
frequented tourist areas.
MARKETING STRATEGY
PCN's marketing objective is to stimulate demand for PCS voice and data services
and attract subscribers by providing superior service and reliability at
attractive prices. PCN plans to generate demand by introducing a better
alternative to cellular service. PCN intends to concentrate its PCS marketing
efforts on the following key customer segments: (i) high-mobility customers
using or considering cellular telephones who would benefit from fewer dropped or
blocked calls; and (ii) low-mobility customers attracted to PCS as a more
convenient alternative to their landline telephones, particularly those who have
multiple telephone lines to their home or business.
PCN believes it can offer competitively priced services that emphasizes voice
clarity, reliability and a low probability of blocked calls, encryption,
international calling and roaming, internet e-mail, and information services.
PCN includes certain basic features including call waiting, call forwarding,
caller I.D., voice mail and paging, and enhanced features such as
voice-activated dialing, news and weather reports and stock market quotes as
part of its product offerings. PCN will provide true encryption services which
improves call security and should encourage users to make confidential
professional and personal calls that they would be unwilling to make on cellular
telephones. In addition, the convenience of a single telephone number for
mobile, home and office use available to the customer throughout the PCN service
area and with the use of easy-to-use, menu-driven subscriber functions should
enhance the usage of PCN's services. PCN will also offer an attractive prepaid
calling plan and plans to establish a significant subscriber base among
budget-conscious businesses, individuals, students, and individuals who have bad
credit or no credit history.
PCN's strategy is to pursue multiple distribution channels through which to
market its services, generally on a non-exclusive basis. PCN will sell
telephones like any other off-the-shelf product through highly focused retail
centers as well as on the internet. The service can be activated over the air in
minutes by customers after purchasing the telephone, unlike traditional cellular
sales. PCN's telephones will also be available by calling a toll free phone
number in PCN's planned call center in Burlington, Vermont to have a PCS phone
mailed at no delivery charge.
<PAGE>
PCS COMPETITION
The success of PCN PCS business will depend upon its ability to compete with two
existing cellular operators and potential future wireless communications
providers. For example, Bell Atlantic Mobile ("Bell Atlantic") and Rural
Cellular Corporation ("Rural") currently provide cellular services in PCN's
license territories.
The BTAs owned by PCN are located in the following Major Trading Area ("MTAs"),
with ownership as indicated below.
<TABLE>
<CAPTION>
A BLOCK TECHNOLOGY B BLOCK TECHNOLOGY C BLOCK TECHNOLOGY
BTA MTA LICENSEE PLATFORM LICENSEE PLATFORM LICENSEE PLATFORM
--- --- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Burlington New York Omnipoint GSM Sprint CDMA PCN GSM
Rutland New York Omnipoint GSM Sprint CDMA PCN GSM
Bangor Boston AT&T TDMA Sprint CDMA PCN GSM
Lewiston Boston AT&T TDMA Sprint CDMA PCN GSM
Waterville Boston AT&T TDMA Sprint CDMA PCN GSM
Elmira New York Omnipoint GSM Sprint CDMA PCN GSM
</TABLE>
There are also three competitors that hold 10 MHz of spectrum in each of PCN's
BTA's (D, E and F block). AT&T and Sprint are the two largest license owners in
the United States. Sprint owns 30 MTAs with a total population of over 150
million and AT&T owns 21 MTAs with a total population of over 107 million. The
massive size of the investment and financing requirement in these wireless
licenses has been the driving force behind the AT&T divestiture. Sprint
partnered with several cable companies to share the investment required. Both
companies are concentrating their investment and efforts in the major MTA market
centers.
PCN's primary competitors within the territories will be AT&T, Sprint and
Omnipoint. These providers have selected incompatible technologies with each
other and only Omnipoint has selected a technology compatible with PCN. AT&T has
selected IS-136 TDMA and Sprint has selected CDMA. Omnipoint has selected GSM.
PCN is currently discussing license agreements and roaming development with
Omnipoint. However there can be no assurances that Omnipoint will enter into any
licensing and/or roaming agreements with PCN. The two companies' technology is
compatible and Omnipoint owns several territories adjacent to those held by PCN.
All of PCN's main competitors have substantially greater financial, technical
and other resources than the Company.
PCN's competitive stance is to be the FIRST TO MARKET with aggressive marketing
and pricing. The massive deployments in the rest of the nation by the major
licensees offers PCN an estimated three-year window of opportunity before these
competitors will enter the markets targeted by PCN. PCN believes that Enhanced
Specialized Mobile Radio ("ESMR") will have a limited competitive impact against
PCS largely because technical limitations and limited bandwidth have caused the
ESMR operators to target primarily vertical market niches such as dispatch
services. In the future, PCS could potentially compete more directly with
landline telephone service providers and other technologies including mobile
satellite systems.
REGULATORY ENVIRONMENT
The FCC regulates the licensing, construction, operation and acquisition of
wireless telecommunications systems in the U.S. pursuant to the Communications
Act of 1934, as amended (the "Communications Act"), and the rules, regulations
and policies promulgated by the FCC thereunder. Under the Communications Act,
the FCC is authorized, among other things, to allocate, grant, rescind and deny
licenses for PCS frequencies, establish regulations governing the
interconnection of PCS systems with wireline and other wireless carriers, grant
or deny license renewals and applications for transfer of control or assignment
of PCS licenses, establish other regulations governing the operations of PCS and
other telecommunications carriers and impose fines and forfeitures for any
violations of FCC regulations.
PCS LICENSING
The FCC established PCS service areas in the U.S. based upon Rand McNally's
market definition of 51 MTAs comprised of 493 smaller BTAs. In June 1994, the
FCC finalized the allocation of the 1.85 to 1.99 GHz bands for broadband PCS
services. The Commission distinguished the licenses along four dimensions,
including (i) the amount of RF spectrum - 30 MHz versus 10 MHz, (ii) the size of
geographic area-MTA versus BTA, (iii) the eligibility to hold the license and
participate in the specific auction for each type of license, and (iv) the
timing of the auctions regarding each of the above categories.
The FCC decided that two 30 MHz licenses, designated as Blocks A and B, would be
allocated geographically by MTAs (these include the Block A licenses granted to
the Pioneers in their respective MTAs). The 30 MHz MTA auction ended in March
1995, and the FCC granted those licenses in June 1995. Four licenses designated
as Blocks C, D, E and F were
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allocated by BTAs. The C and F Block licenses were allocated 30 MHz and 10 MHz
of spectrum, respectively and reserved for "Entrepreneurs." Eligibility to bid
for and hold licenses in the C and F Blocks was limited to entities that
together with their affiliates and certain investors, had gross revenues of less
than $125 million in each of the two years preceding the auction and total
assets of less than $500 million. Eligible bidders in the Entrepreneurs' Band
were given certain bidding credits and successful bidders were given favorable
installment payment terms. The most favorable bidding credits and installment
payment options were available only to C Block applicants that qualified as
small businesses, and to F Block applicants that qualified as very small
businesses. Generally, a small business is an entity that has average annual
gross revenues of not more than $40 million for the preceding three relevant
years while a very small business is an entity that has average annual gross
revenues of not more than $15 million for the preceding three relevant years.
In determining whether a C or F Block applicant met the financial caps for
qualification as an Entrepreneur, a small business or a very small business, the
FCC examined, individually and cumulatively, the assets and revenues of the
applicant, its affiliates, investors with more than 25% or 49.9% (depending on
which of the two control group equity structures is used) of the applicant's
fully-diluted equity or voting stock and its control group members. Applicants
seeking to qualify as an Entrepreneur, a small business or a very small
business, had to be controlled by a control group made up principally of
individuals or entities who met the financial qualifications applicable to
Entrepreneurs. Only certain non-qualifying investors could be in the control
group, such as members of the entity's management team or qualifying
institutional investors. The control group had to hold at least 25% or 50.1%
(depending on which control group equity structure is used) of the applicant's
total equity during the first three years and 50.1% of the applicant's voting
stock for the initial term of the license.
Over time, C and F Block licensees (as well as their affiliates and investors)
may exceed the gross revenue caps through equity investment by non-attributable
investors, debt financing, revenue from operations, business development and
expanded service. Furthermore, after three years from the date of the license
grant, the qualifying members of the control group will be required to hold only
10% or 20% of the total equity (depending on which control group equity
structure is used). The control group must retain at least 50.1% of the
ownership of voting stock, however, for the duration of the initial 10 year
license term, and the control group must exercise de facto as well as de jure
control over PCN. The FCC has stated that it will conduct audits to ensure
compliance with Entrepreneurs' Band regulations.
The Entrepreneurs' Band auction for the C Block licenses ended in May 1996. The
auction for the D, E and F Block licenses ended on January 14, 1997. The
remaining 20 MHz of the 140 MHz of PCS spectrum 1910-1930 MHz available was
allocated for unlicensed PCS applications such as wireless PBX adjuncts, LANs
and home cordless telephones. All PCS licensees will be granted for a 10-year
period, at the end of which they must be renewed. Licenses may be revoked at any
time for cause.
In September 1997, the FCC issued a Report and Order which changed the payment
terms available to Entrepreneurs' Band licensees and offered various options for
reducing the licensees' debt by returning all or portions of their spectrum. On
March 24, 1998, the FCC issued its Reconsideration Order which modified these
option.
The FCC intends to re-auction the returned portions of an Entrepreneurs'
spectrum in the future, although no timetable has been set. PCN chose the
Disaggregation Option in each of its BTAs. See Note 20 in the accompanying
financial statements for a discussion of the Disaggregation Option. As a result
of PCN's election of the Disaggregation Option, the FCC will re-auction the
returned spectrum in the future thereby allowing a potential competitor to enter
each of PCN's BTAs. Again, no timetable has been set for the re-auction of PCN's
returned spectrum. PCN's competitive stance is to be first to market.
PCN and other networks share spectrum partially occupied by private and common
carrier fixed microwave users. Many of these microwave incumbents provide
services that may interfere with or receive interference from the operation of
PCS networks and, as a result, may have to be relocated by PCN. In an effort to
balance the competing interests of existing microwave users and newly authorized
PCS licensees, the FCC adopted a transition plan to relocate such microwave
operators to other spectrum blocks. Whenever PCN displaces a microwave
incumbent, PCN must pay at least the microwave incumbent's relocation expenses,
and may be required to take actions necessary to put the microwave incumbent's
new facility into operation. PCN may also be required to reimburse other
entities for the relocation by such entities of microwave incumbents that PCN
would have displaced. PCN continues to make it a goal to implement a frequency
plan that will minimize to the extent possible the number of existing microwave
users that need to be relocated.
<PAGE>
CONDITIONS ON LICENSES
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 form 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 forfeiture.
The Entrepreneurs' Band licensees are prohibited from voluntarily assigning or
transferring control of their licenses for five years after grant date except to
assignees or transferees that satisfy the financial criteria established for the
entrepreneurs' Band. Any transfers or assignments during the 10-year initial
license term are subject to unjust enrichment penalties including the forfeiture
of any bidding credits and the acceleration of any installment payment plans if
the assignee or transferee does not qualify for the same benefits. In addition,
licensees must maintain their Entrepreneurs' Band eligibility for five years
from the date of initial license grant. In that regard, however, increased gross
revenues, increased total assets from non-attributable equity investments, debt
financing, and revenue from operations, business development or expanded service
are not considered by the FCC. In addition, to maintain all of the benefits of
its "Designated Entity Status," PCN's control group and qualifying investors
must retain certain minimum stock ownership and voting stock of PCN and meet
certain other criteria. The FCC has announced that it may conduct audits to
ensure compliance with all license conditions.
CITIZENSHIP REQUIREMENTS
Prior to the implementation of the World Trade Organization ("WTO") in early
1998, no more than 20% of any subsidiary of PCN that holds an FCC license could
be owned directly by non-U.S. citizens or their representatives; and the FCC has
no discretion to depart from that limit. On November 25, 1997, the FCC issued a
Report and Order implementing the new rules that will take effect after the WTO
effective date. In general, the U.S. has allowed companies from all countries
that are signatories of the WTO (and are in compliance) to indirectly own up to
100% of U.S. Telecommunications companies. Any such foreign investments are
still potentially subject to a review by the FCC, but the presumption is that
investments made by WTO members' companies will be approved. PCN has no
knowledge of any present foreign ownership in violation of the Communications
Act.
TELECOMMUNICATIONS ACT OF 1996
The Telecom Act of 1996 (the "Telecom Act") is the first comprehensive
legislation changing telecommunications regulation in over 60 years. In general,
its goal is to remove the statutory, regulatory and court-ordered barriers that
historically prohibited new entrants into many segments of the
telecommunications industry. The primary goal of the Telecom Act is to allow
LECs, long distance carriers, cable companies, broadcasters and others to
compete directly. The Telecom Act attempts to create opportunities for
competition with the local loop, while allowing monopoly LECs eventually to
enter the long distance market. It requires the BOCs and other incumbent LECs to
permit competitors to interconnect with their local loop networks through
unbundled network elements, resale and collocation. The passage of the Telecom
Act will affect the business of PCN because of the likely creation of more
opportunities to compete in both the local exchange and long distance markets
for the same or similar types of services that PCN plans to offer as well as the
specific treatment of commercial mobile radio service operators such as PCN.
However, PCN cannot predict the exact nature and extent of this competition. On
August 1, 1996, the FCC adopted rules implementing the interconnection
provisions of the Telecom Act that provide for unbundled interconnection at the
incumbent LEC's long run incremental costs plus a reasonable share of
forward-looking joint and common costs ("total element long run incremental
cost") and for resale of incumbent LEC retail services at substantial discounts
off of retail rates (with a default range of 17-25%). On October 15, 1996, the
U.S. Court of Appeals for the Eighth Circuit issued a stay of FCC's
interconnection and resale pricing rules pending final determination of the
challenges brought against FCC's August 1 interconnection Order. In November
1996, the stay was partially lifted with respect to rules governing
interconnection between LEC and wireless carriers. The Court of Appeals in 1997
ruled against the FCC with respect to wireline interconnection issues, but
upheld the FCC on wireless interconnection and the FCC is evaluating its options
on how to proceed. In addition, the FCC has adopted rules regarding telephone
number portability pursuant to which subscribers will be able to migrate their
landline and cellular telephone numbers to a PCS carrier, or from a PCS carrier
to another service provider. The FCC is also conducting or planning to conduct a
number of rulemaking proceedings, including proceedings anticipated to establish
rules expected to result in an overhaul of the access charges paid by long
distance carriers to LECs and the funding mechanisms for universal service which
may require PCS licensees such as PCN to pay charges to support universal
services, as well as "calling party pays" issues.
<PAGE>
THRESHHOLD COMMUNICATIONS, INC.
STRATEGY
TCI's strategy for its paging service business is to become a leading local
provider of numeric and alphanumeric paging services. TCI will market its
services directly to customers in the New York, New Jersey area through highly
focused retail locations and inbound telemarketing.
INDUSTRY BACKGROUND
Paging has evolved from the simple beeper with local coverage to a multi-faceted
mobile communications service offering regional and nationwide coverage. Some of
paging's unique advantages include ease of use, low cost for basic service,
small size, light weight, and long battery life. These advantages have largely
insulated the paging industry from the competition of other wireless media and
contributed to its phenomenal growth. Paging now reaches an estimated 34 million
paging subscribers and industry experts expect double-digit subscriber growth
for the foreseeable future. Enabled by technological advances and new frequency
allocations, paging companies are deploying modern networks that allow the use
of higher-speed messaging technology, increased transmission capacity, and
enhanced two-way data and voice-messaging capabilities (often referred to as
narrowband personal communications services, or NPCS). Paging will be
characterized by continued industry consolidation, increased usage by
non-business users, expanded nationwide capabilities, continued price
competition among paging companies, and competition from digital cellular,
broadband PCS, and mobile satellite services.
The paging industry dates back to 1949, arising from the need for remote
notification of waiting messages where intercom or telephone communications were
not a viable option. Historically, the paging industry has been highly
fragmented, consisting of many small operators serving primarily business
customers. In recent years, the industry has undergone considerable
consolidation and now attracts significant numbers of non-business users.
At present, there are four basic types of paging services - tone only,
tone-voice, digital display, and alphanumeric with additional narrowband
personal communications services (NPCS), such as newly available two-way paging,
expected to be commonplace soon. Tone-only pagers emit a tone alerting the
recipient to call in for messages. Tone-voice pagers emit a tone to signal an
incoming message and then play a short voice message dictated by the caller.
Each of these two services has steadily declined in market share - tone-only
because of service limitations and tone-voice because of phaseout by operators
due to its inefficient use of spectrum. The third type of service, digital
display, or numeric paging, represents the lion's share of the market. This
service enables the caller, using a standard touch-tone keypad, to enter a phone
number, which is then displayed on recipient's pager. The fourth type of service
is alphanumeric, introduced in the late 1980s. These pagers enable full-text
messages to be entered by a dispatcher or directly from a computer and then
displayed on the subscriber's unit. Alphanumeric pagers currently account for
about 12 percent of the market and are growing fast. Narrowband PCS
applications, introduced recently, include acknowledgement paging, which enables
receipt of a message to be confirmed, and two-way test, which enables the
recipient to send an alphanumeric response to the sender.
According to industry estimates, more than 42 million paging units are currently
in service. The average annual subscriber growth rate for the industry has been
approximately 30 percent for the past four years. This dramatic growth is linked
to declining prices for units and service, greater awareness and use by the
general public, and carriers' enhanced distribution in the consumer marketplace.
Consumers have come to value the convenience of paging for staying in touch with
friends and relatives. In fact, over half of new paging services are now
purchased for personal rather than business use.
Paging companies use several distribution channels to attract customers,
including direct sales, third-party resellers, private-brand strategic
partnerships, and retail stores. For instance, new points of distribution are
opening up in grocery stores, discount stores, and other shopping locations. In
addition, marketing partnerships between paging companies and retailers or
producers (e.g. MobileMedia - PepsiCo) are becoming more common.
Each month, a portion of a company's existing customers leaves for a variety of
reasons, including failure to pay, dissatisfaction with service, and switching
to a competing provider. Typical monthly disconnect, or churn, rates over the
past few years have been in the range of 2-4 percent, based on the number of
existing subscribers.
Paging revenues, including fees collected for rental units, have increased by
some 20 percent over the past four years and now amount to almost $4 billion per
year. Revenue growth has been less than subscriber growth because of drops in
service prices. Revenues for paging, including narrowband personal
communications services (NPCS), are projected to increase by about 10 percent
annually through the end of the decade. Approximately 80 percent of current
revenues are associated with digital display pagers, with alphanumeric
accounting for most of the remainder. Alphanumeric is the fastest growing paging
service segment, while tone-only and tone-voice services have each decreased to
below 5 percent of revenues.
<PAGE>
Narrowband PCS is introducing new capabilities and is widely expected to grow in
popularity, perhaps accounting for as much as 10 percent of overall paging
industry revenues by the year 2000.
Paging service rates usually include a fixed monthly fee (typically $10-40,
depending on local or nationwide service and whether the pager is rented or
owned), which includes a certain allotment of free incoming pages (or characters
for alphanumeric service). Excess usage rates are typically $.10-.25 per page
(or $.02-.04 per character for alphanumeric). Approximately 90 percent of a
company's average revenue per unit (ARPU) is attributable to fixed fees. An
additional source of revenue is the sale of the pagers themselves - over half of
all pagers in service are customer owned. However, companies generally break
even on sales of pagers, which for competitive reasons are sold at or below
cost.
Monthly service ARPUs (i.e. not including equipment rental) have declined during
the last five years from a typical level of $13 to about $9. Despite this
downward trend, total revenues are rising because of increasing demand. In
addition, occasional increases in ARPU can be expected due to a higher mix of
regional and nationwide services; a higher mix of advanced services such as
two-way and voice messaging; and increased direct and retail acquisition of
subscribers, which generally carry a higher ARPU.
TECHNOLOGY
The basic architecture of a paging system consists of a paging terminal and a
tower-based radio transmitter. The terminal receives and encodes messages from
the sender and relays them to the transmitter, which broadcasts the messages on
a specific radio frequency to individual pagers tuned to that frequency.
Messages intended for a particular pager are input by the sender via phone or
computer into the paging system. Traditional one-way paging channels are 24 kHz
wide. To make two-way services possible, paging networks are undergoing a
"cellularization," whereby receiver sites are deployed so that low-power pagers
have back-channel response capabilities.
Major pager manufacturers for the U.S. market include Motorola, NEC, and
Panasonic. The major paging terminal manufacturers are Glenayre/BBL,
Motorola/Unipage, and Zetron.
To a great extent, technological developments in paging are being accelerated by
the availability of two-way national and regional licenses (through the
narrowband PCS auctions) and the ongoing consolidation of the industry.
Narrowband PCS licenses are divided into categories of 50/50 paired, 50/12.5
paired, and 50 unpaired. The first two of these license categories are for
two-way service and entitle the operator to build a system with 50 kHz for the
forward link and either 50 kHz or 12.5 kHz for the return link. The return
links, depending on the amount of frequency available, can be used for data
transfer, message acknowledgement, or location purposes. The third category of
license, unpaired, provided 50 kHz for one-way services. The spectrum bands and
licenses available in narrowband PCS provide the basis for services (such as
two-way, alphanumeric, and voice messaging) which are the next evolutionary step
from traditional paging.
Companies are increasingly deploying modern digital transmission networks, which
allow the use of high-speed messaging technology and increase system reliability
and capacity. Many modern networks are based on the Motorola-developed FLEX
family of protocols as well as the PACT system, which stands for personal air
communications technology, developed by AT&T. Both technologies allow for
high-speed, two-way messaging and can accommodate a range of applications, such
as voice messaging, location monitoring, and acknowledgements. Potential uses
include alarm monitoring, news and weather updates on demand, vehicle dispatch,
vehicle tracking, vending machine monitoring, and utility meter reporting.
PAGING MARKETS
TCI operates a 900 MHz satellite-based FLEX paging network manufactured by
Glenayre that includes 34 FCC-approved paging antenna sites, 33 of which are
operational. TCI holds two paging licenses in the 900 MHz band. One, for
frequency 929.0875 MHz, covers the greater New York area, while the other, for
frequency 929.2625 MHz covers southern New Jersey.
MARKETING STRATEGY
TCI's marketing objective is to attract subscribers by providing superior local
paging services at attractive price. TCI intends to concentrate its paging
marketing efforts on offering pager services directly to consumers and
businesses as opposed to resellers of TCI's paging airtime. This will be done
through a corporate sales force, highly focused retail locations and inbound
telemarketing that will result from print ads, radio and cable television
advertising. This strategy will cut out the "middle man" or reseller and allow
TCI to offer low cost paging services directly to the end user who requires only
local service.
COMPETITION
<PAGE>
The major paging operators that operate in TCI's license areas include Pageing
Network, Inc. (PageNet), MobileMedia, AirTouch, Arch Communications, PageMart,
Metrocall, and Mtel. Each firm provides paging services in most of the United
States and is experiencing annual subscriber growth rates in excess of 50
percent. These growth rates are higher than the industry average because of
acquisitions as well as internal growth. Taken together, these firms account for
about half of all U.S. paging subscribers. TCI also competes with smaller paging
service providers and regional telephone companies such as Bell Atlantic that
provide paging services. Many of these companies have substantially greater
financial, technical and other resources than the Company.
REGULATION
Paging falls under the regulatory auspices of the FCC. Frequencies widely
available for paging include the 150 MHz, 450 MHz and 900 MHz bands. Prior to
the 1990s, licenses for a specific frequency were granted largely on a
site-by-site basis, which partially explains the large number of paging firms
and fragmented structure of the industry. Licenses were granted by application
or, in the case of competing applications for the same location and frequency,
by lottery. In response to frequency congestion and to simplify the provision of
nationwide services, the FCC allowed new spectrum allocations in the 1980s and
designated three frequencies in the 931 MHz range for the exclusive use of
nationwide paging.
In the early 1990s, the FCC allocated 2 MHz of spectrum for narrowband PCS in
the 901-902, 030-931, and 940-941 bandwidths, defining it as "a family of mobile
services including advanced voice paging, data messaging, acknowledgement
paging, and both one-way and two-way messaging." Narrowband PCS licenses were to
be granted by auction on a nationwide, regional, major trading area (MTA) and
basic trading area (BTA) basis. Under this scheme, any given geographical
location is to be covered by some two-dozen licenses comprising nationwide,
regional, MTA or BTA coverage, as well as a mix of one- and two-way services.
Holders of nationwide, regional and MTA licenses are required to provide service
to at least 37.5 percent of the population within 5 years and 75 percent of the
population within 10 years. In mid-1994, the FCC concluded the first round of
narrowband PCS auctions, allocating 10 national licenses and nearly 600 licenses
for single-city or regional services. The final narrowband PCS auctions, for
over 1,000 one- and two-way licenses, took place in 1996.
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") licenses are
generally non-exclusive, i.e. shared among ten or more licensees. The Company
holds PCP licenses.
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 its 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.
EMPLOYEES
As of July 1998, the Company and its subsidiaries had a total of 11 employees,
including 4 in the paging subsidiary, TCI, 1 in the PCN subsidiary, and the
remaining 6 employees employed by the Company. PCN's future success will depend
in significant part on its ability to attract and retain key technical, sales
and senior management personnel. Competition for such personnel is intense and
there can be no assurance that PCN can attract and retain key managerial, sales
and technical employees. PCN's employees are not represented by a labor union.
PCN has not experienced any work stoppages and considers its relations with its
employees to be good.
ITEM 2. PROPERTIES
In December 1997, the Company relocated its executive offices from 10 Plog Road,
Fairfield, New Jersey to 425 Broad Hollow Road, Melville, New York ("Corporate
Office"). The Corporate office is approximately 1,458 square feet and houses the
Company's executive offices and accounting department. The lease for the
Corporate Office was entered into on December 8, 1997 (the "Melville Lease") and
is for a term of five years. Over the five-year lease period the monthly rent
<PAGE>
ranges from $2,978 to $3,127. As the number of employees employed at the
Corporate Office has increased since December 1997, Management, as of May 1998,
has begun looking for new office space of approximately 4,000 square feet.
New office space has not been identified as of July 1998.
On July 10, 1997, PCN, subject to its due diligence review, entered into a
Purchase and Sale Agreement for an 8,000 square foot facility in Burlington,
Vermont. This facility will house PCN's customer care and billing, technical
support personnel, switch room and limited administrative staff. The purchase
price of the facility if $550,000. The Company is currently looking to obtain
commercial financing to assist in the financing of the Vermont facility.
In July 1998, TCI rented an office space in New Hyde Park, New York to house its
customer care and billing, managerial and technical support staff for its paging
operations. All functions related to the paging operations, other than
accounting, will be handled out of the New Hyde Park facility. Accounting for
TCI will continue to be administered at the Corporate Offices. In addition to
the New Hyde Park location, TCI rents space in West Orange, New Jersey to house
its paging system's Glenayre GL-3000 E.S. terminal (the "Terminal"). As of July
1998, Management is considering relocating the Terminal to Plainview, New York
to be closer to TCI's technical support located in New Hyde Park, New York. TCI
also leases 33 sites for its paging transmitters. Site rentals range from $500
to $1,500 per location.
ITEM 3. LEGAL PROCEEDINGS
On March 4, 1996 the Company commenced an action entitled Electronics
Communications Corp. against Toshiba America Consumer Products, Inc. ("Toshiba")
and Audiovox Corporation ("Audiovox"), case number 96 Civ. 1365, in the United
States District Court of the Southern District of New York. The Complaint
asserted claims for antitrust, breach of contract, tortious interference with
contract and tortious interference with prospective economic advantage and
business relations. The Complaint sought damages in excess of $3,000,000. This
action was commenced because the Company appeared to have expended significant
monies and resources including the issuance of 16,667 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, due to the withdrawal of Toshiba's commitment based on what the Company
believed was an unlawful conspiracy with Audiovox. Immediately prior to the
commencement of the program, Toshiba discontinued manufacturing the line of
cellular telephones that the program was designed to offer. The Company believed
this decision had been caused by Audiovox.
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 claiming that the remaining claims should be dismissed for the lack of
supplemental jurisdiction, which could then be prosecuted in state courts. On
August 12, 1996, the Court ruled in favor of the motion of defendants Toshiba
and Audiovox, and the case was dismissed on such date. The Company appealed the
Court's ruling, which ruling was affirmed by the U.S. Court of Appeals for the
Second Circuit October 8, 1997. New management and counsel reviewed the
possibility of successfully asserting State Law Claims and, as a result,
determined that it was advisable to resolve all claims by and between Toshiba
and the Company, including Toshiba's claim for merchandise shipped of
$379,384.54. This claim was settled on what management believes were favorable
terms for the Company. Mutual releases were exchanged by Toshiba, Audiovox and
the Company.
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 therein, resulting in the
Imposition of a "short rate" with higher payment requirements. As a result,
Plaintiff claimed damages aggregating $156,284.87. This matter and outstanding
obligations of the Company to The Daily News was settled for $50,000.
On or about July 11, 1997, the Company was served with a Summons and Complaint
in an action entitled: Brightpoint, Inc. v. Free Trade Distributors, Inc. and
Electronics Communications Corp, in the United States District Court for the
southern District of Indiana, Indianapolis Division. Brightpoint is a former
supplier of the Company and claims that the Company owed it approximately
$400,000 plus interest for merchandise delivered, consisting principally of
cellular telephones. New management and counsel, after a review of the matter,
participated in a one-day mediation in Indianapolis and resolved this claim on
what management believes were favorable terms for the Company. A General Release
was delivered to the Company.
On or about October 15, 1997, the Company was served with a Summons in an action
entitled: Motorola, Inc., Plaintiff, v. Electronics Communications Corp.,
Defendant, in the Superior Court of New Jersey Law Division: Union County
Special Civil Part. Motorola claims the Company owes it approximately $106,000
including interest for merchandise, consisting of
<PAGE>
various pager parts and equipment, restocking fees of approximately $13,100, and
attorneys' fees. New management and counsel, after a review of the matter,
believe that Motorola is inaccurate in its claim and has made several attempts,
which were unsuccessful, to settle this matter. On or about May 15, 1998,
Motorola filed a Motion for Summary Judgement with the Superior Court of New
Jersey Law Division, Essex County. On June 19, 1998, Motorola's motion for
summary judgement was denied. Despite the Company's lack of success in the past
in settling this matter, management, in an effort to avoid litigation and
minimize attorneys' fees, will continue its efforts to resolve this dispute on
terms management believes to be favorable for the Company. There can be no
assurances that the Company will be successful in settling this dispute and
avoiding litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the fiscal year ended
March 31, 1998 to a vote of the Company's security holders. However, on May 28,
1998, the Company held a special meeting in lieu of annual meeting of
stockholders. At the meeting (at which an aggregate 5,908,223 shares of Common
Stock were entitled to be voted), the following four individuals, namely
For Votes
Joseph A. Rosio 5,658,655
John P. Cassella 5,658,655
Christopher J. Garcia 5,658,655
Mal Gurian 5,658,405
were elected to serve as directors of the Company until the next annual meeting
of stockholders and until their successors are elected and qualify. The number
of votes listed opposite each director's name constitutes the number of votes
cast in favor of his election at the meeting.
At the meeting 5,693,216 shares of Common Stock were voted in favor and 41,047
shares of Common Stock were voted against a proposed amendment to the Company's
Certificate of Incorporation to change the Company's name to "Northeast Digital
Networks, Inc." Therefore, the proposal was duly adopted in accordance with
Delaware law.
Also at the meeting, 5,534,446 shares of Common Stock were voted in favor and
204,683 shares of Common Stock were voted against a proposed amendment to the
Company's Certificate of Incorporation to limit the liability of a director for
monetary damages to the Company or its stockholders for breach of fiduciary
duty, to liability (i) for breach of the director's duty of loyalty to the
Company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
willful or negligent violations by the director of the provisions of Delaware
law concerning unlawful stock purchases or redemptions and the unlawful payment
of dividends, and (iv) for any transaction from which the director derived an
improper personal benefit. Therefore, the proposal was duly adopted in
accordance with Delaware law.
Also at the meeting, 5,628,713 shares of Common Stock were voted in favor and
113,039 shares of Common Stock were voted against a proposed amendment to the
Company's Certificate of Incorporation to ratify the change in the par value of
the Common Stock from $.05 par value to $.60 par value and in connection
therewith, to ratify the one-for-twelve reverse stock split of the Common Stock
authorized by the Board of Directors effective July 31, 1997. Therefore, the
proposal was duly adopted in accordance with Delaware law.
An amendment to the Company's certificate of incorporation incorporating the
foregoing amendments was duly filed with the Delaware Secretary of State on June
16, 1998.
Finally, at the meeting, 3,468,717 shares of Common Stock were voted in favor
and 147,036 shares of Common Stock were voted against a proposal to approve the
Company's October 30, 1997 Stock Option Plan which provides for the grant of
options to officers, directors and key employees with respect to a maximum
1,000,000 shares of Common Stock, $.60 par value.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on The Nasdaq Stock Market, Inc. (Small
Cap) under the symbol "GSMI." The following table sets forth the range of high
and low closing bid prices for the Common Stock on the NASDAQ Small Cap Market
for the periods indicated as derived from reports furnished by the National
Quotation Bureau, Inc. All such prices have been adjusted to give effect to the
one-for-twelve reverse stock split effected on July 31, 1997. Prices for periods
prior to the split have been computed by multiplying the actual bid price by
twelve. No assurances can be given that the actual bid prices for the Common
Stock would have approximated the prices set forth in the table for periods
prior to July 31, 1997 if the one-for-twelve reverse stock split
<PAGE>
had been in effect during such prior period. Furthermore, the prices in the
table represent prices between dealers, do not include mark-ups, mark-downs, or
commissions and may not necessarily represent actual transactions.
Closing Bid Price
CALENDAR YEAR HIGH LOW
1996
First quarter $27.75* $22.50*
Second quarter 30.75* 18.00*
Third quarter 23.25* 6.375*
Fourth quarter 27.00* 15.375*
1997
First quarter $22.50* $15.375*
Second quarter 18.375* 4.875*
July 1-30 5.25* 3.75*
July 31-September 30 3.00 1.625
Fourth quarter 2.9375 1.375
1998
First quarter $ .875 $ .28
- ------------
*As adjusted
The Company has been advised by NASDAQ that if its Common Stock fails to
maintain a $1.00 or greater closing bid price on NASDAQ for at least 10
consecutive trading days during the 90-day period ending August 14, 1998, the
Common Stock will be subject to delisting from NASDAQ. In the event such price
is not achieved for 10 consecutive trading days during such period, the Company
may stay the delisting by requesting a hearing prior to the close of business on
August 14, 1998. No assurance can be given that the Company will be successful
in continuing to maintain the listing of the Common Stock on NASDAQ. In the
event the Common Stock is delisted from NASDAQ, it will presumably continue to
trade on the Boston Stock Exchange and is also expected to trade on the OTC
Bulletin Board under the symbol "GSMI."
At June 9, 1998, the number of record owners of the Company's Common Stock
totalled 497. Such number of record owners was determined from the Company's
shareholder records and does not include beneficial owners whose shares are held
in nominee accounts with brokers, dealers, banks and clearing agencies. In view
of the fact that a large number of shares are in nominee names, the Company
believes that the number of beneficial owners is substantially greater.
The Company has not paid dividends on its Common Stock in the past and
anticipated capital requirements make it unlikely that it will pay dividends on
the Common Stock in the foreseeable future.
The Company hereby incorporates by reference, the information contained in the
first and third paragraphs of Note 2 to Amendment No. 1 to its report on Form
10QSB/A for the quarterly period ended September 30, 1997 with respect to a
Private Placement conducted by it in May 1997 of units of common stock and
warrants to certain "accredited" investors and the exchange in August 1997 by
such investors of their units for an aggregate $2,470,334 principal amount of
the Company's 8% Convertible Debentures.
ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto.
OVERVIEW
The Company through its PCN subsidiary, is licensed by the FCC to provide
wireless telecommunications services, which include the ability to deliver
traditional telephony along with new digital technologies that allow fax,
internet, e-mail and short message services (e.g., sports scores, weather, stock
quotes, etc). PCN's personal communication services ("PCS") licenses cover
nearly contiguous markets in Vermont, Maine and a small portion of Northern New
Hampshire, as well as a small market in Upstate New York that extends into
Pennsylvania. PCN's six Basic Trading Areas ("BTA") cover approximately 1.5
million potential subscribers ("POPs"). The Company is currently in the
engineering and design phase for the build out of a wireless mobile
communications network utilizing GSM as its
<PAGE>
technology platform. PCN is also licensed to provide local and long distance
services in Vermont, Maine and New York and may incorporate such services
through "bundling," upon completion of its PCS network.
The Company, through its TCI subsidiary, currently operates a state of the art
digital 900MHz Glenyre satellite-based Flex paging system, which covers the New
York Metropolitan area and New Jersey. Due to the recent construction of the
Company's paging network, a significant portion of the Company's paging revenues
continues to be derived from the resale of other carrier's airtime.
RESULTS OF OPERATIONS
YEAR ENDED ON MARCH 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Total sales decreased approximately $5,021,599 or 68% for the year ended March
31, 1998 compared to the year ended December 31, 1996. Commissions and
Electronics Revenues decreased approximately $3,202,393 and $2,977,712,
respectively. The Company attributes the decrease in Electronics revenues to its
exit from the distribution of consumer electronics, which was conducted at the
Company's wholly owned subsidiary, Free Trade Distributors, Inc. ("Free Trade").
Free Trade was engaged in the wholesale distribution of cellular telephones,
related accessories and other electronic products. Such discontinuation of this
line of business resulted in a related decrease in cost of sales of
approximately $2,506,323 for the same period.
Commissions revenue decreased due to the loss of the Company's Master Agent
Agreement with NYNEX Mobile Communications, Inc. ("NYNEX") and Bell Atlantic
Mobile, Communications, Inc. ("BAM"). On May 15, 1997, the Company entered into
a Settlement & Separation Agreement (the "Settlement Agreement") whereby the
Company severed its agency relationship with NYNEX and BAM with respect to the
solicitation of cellular activations. The contract with NYNEX and BAM was the
Company's largest source of commission income. As a result of the Settlement
Agreement, the Company's inability to establish a profitable relationship with
another cellular carrier, a lack of available resources and continuing losses,
the Company ceased cellular phone activations. Such discontinuation of this line
of business resulted in a related decrease in cost of sales of approximately
$2,575,801 for the same period.
Paging and Two Way Radio Revenue increased approximately $1,158,506 for the year
ended March 31,1998 compared to the year ended December 31, 1996. This increase
was due to the acquisition in June 1996 of 51% of Threshold Communications,
Inc., which engaged in the resale of radio paging services in the New York
Metropolitan area. Additionally, in March 1997 the Company completed
construction of its 900 MHz flex paging system thereby becoming a paging
carrier. Such acquisition resulted in a related increase of cost of sales of
approximately $1,608,082.
Selling, General and Administrative Expenses ("SGA") for the year ended March
31, 1998 was $6,441,616 compared to $6,988,393 at year ended December 31, 1996,
an approximate decrease of 8%. While SGA related to the Company's recently
discontinued consumer electronics and cellular phone activations businesses
decreased, offsetting expenses were incurred due to the Company's refocusing of
its efforts towards the build-out of its PCS licenses and provision of digital
wireless services. Also included in the SGA for the year ended March 31, 1998
are the following items: (a) Charge to salary expense of $524,000, which
represented amounts paid to previous officers and directors of the Company in
exchange for, among other thing, the rescission of all employment agreements.
(b) Acceleration of unamortized deferred marketing cost in the amount of
$330,000, which resulted from the completion of services under the Marketing
Service Contract by and between the Company and Great Deals Inc., dated
September 4, 1996. (c) A charge to bad debt expense in the amount of $368,000 as
a result of the Company's re-evaluation of its outstanding accounts receivable
balances.
Interest expense was $3,911,291 for the year ended March 31, 1998 compared to
$206,060 for the year ended December 31, 1996. Interest expense increased as a
result of leases for office equipment and paging equipment, increased bank
borrowings, the private placement of 8% convertible debentures on August 7,
1997, and the issuance of a total of $500,000 10% one year promissory notes. In
addition, the Company incurred a non-cash interest expense of $3,095,000 due to
EITF Bulletin D-60 discussed more fully in Notes 5(F), 7, and 11 and the
subsequent amortization of deferred finance charge on the sale of the Company's
8% convertible debentures and Series C Preferred Stock.
For the year ended March 31, 1998, the Company recorded $556,787 as
extraordinary income. This amount represents the difference between amounts
recorded in accounts payable and amounts actually paid by the Company through
non judicial settlements with certain of the Company's creditors.
Net Loss for the year ended March 31, 1998 was $10,480,393 compared to
$6,031,090 for the year ended December 31, 1997. Included in the net loss for
fiscal 1998 is interest expense of $3,911,291 of which $3,095,000 was non-cash
due to EITF Bulletin D-60 discussed more fully in notes 5(f), 7, and 11. The
following items are also included in the Net Loss: (a) Charge to salary expense
of $524,000, which represented amounts paid to previous officers and directors
of the Company in exchange for, among other thing, the rescission of all
employment agreements. (b) Acceleration of unamortized deferred marketing cost
in the amount of $330,000, which resulted from the completion of services under
the Marketing Service Contract by and between the Company and Great Deals Inc.,
dated September 4, 1996. (c) A charge to bad debt expense in the amount of
$368,000 as a result of the Company's re-evaluation of its outstanding accounts
receivable balances.
Sales decreased principally as a result of the loss of the Company's Master
Agent Agreement with NYNEX/BAM.
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 $398,083 or 10.5%. 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.
<PAGE>
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 for this sales line 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 of activations (commissions) decreased due to a decrease in sales in 1996
compared to 1995. The gross profit for this sales line 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
$3,848,000 in 1996 compared to 1995. The Company attributes this increase
directly to the Company's growth and movement into the wireless
telecommunications industry. SGA as a percentage of sales increased from 36% for
1995 to approximately 95% in 1996 due to an increase in administrative personnel
required to meet the Company's expansion and growth as a multi-faceted wireless
telecommunications company. The increase in 1996 is also due to higher executive
officer salaries, a charge of approximately $240,000 pursuant to a financial
public relations contract the Company entered into on September 4, 1996 and a
charge of approximately $493,000 related to a bad debt. Interest expenses
increased approximately $121,000 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 $5,823,725 in 1996 compared to operating loss of
$1,967,823 in 1995. Net loss in 1996 after interest expense of $206,060 and a
non-cash expense of $73,769, as a result of a settlement of potential
litigation, was $6,031,090 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.
<PAGE>
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Total sales decreased approximately $707,000 or 82% for the three months ended
March 31, 1998 compared to the three months ended March 31, 1997. The Company
attributes this decrease in part to its exit from the distribution of consumer
electronics line of business, which was conducted at the Company's wholly owned
subsidiary, Free Trade Distributors, Inc. ("Free Trade") and the loss of the
Master Agent Agreement by and between Trade Zone Distributes, Inc ("TZD") and
NYNEX Mobile Communications, Inc. ("NYNEX") and TZD and Bell Atlantic Mobile,
Communications, Inc. ("BAM"). On May 15, 1997, the Company entered into a
Settlement & Separation Agreement (the "Settlement Agreement") whereby the
Company severed its agency relationship with NYNEX and BAM with respect to the
solicitation of cellular activations. The contract with NYNEX and BAM was the
Company's largest source of commission income. As a result of the Settlement
Agreement, the Company's inability to establish a profitable relationship with
another cellular carrier, a lack of available resources and continuing losses,
the Company ceased cellular phone activations. The discontinuation of this line
of business by Free Trade resulted in a related decrease in cost of sales for
the three months ended March 31, 1998 compared to the three months ended March
31, 1997 of approximately $282,000. The discontinuation of this line of this
line of business by TZD resulted in a related decrease in cost of sales for the
three months ended March 31, 1998 compared to the three months ended March 31,
1997 of approximately $75,000. Further contributing to the decrease in sales was
management's redirecting of the Company's resources towards the restructuring of
the Company and its subsidiaries in the third and fourth quarter of fiscal 1998,
thus requiring a significant reduction of sales, marketing and accounting
personnel. The restructuring included a highly focused effort to raise
additional capital in order to settle numerous obligations of the Company and
its subsidiaries and re-position the Company and its PCN subsidiary for entry
into the personal communications service business, including the preparation of
a business plan for PCN and radio frequency proposals for various vendors of GSM
equipment. Paging and Two Way Radio cost of sales increased approximately
$605,000. This increase was due primarily to increased carrier cost and a charge
off of approximately $290,000 to cost of sales for pagers previously capitalized
as fixed assets and depreciated.
Selling, General and Administrative Expenses ("SGA") for the three months ended
March 31, 1998 increased approximately $31,800 compared to the three months
ended March 31, 1997. While SGA related to the Company's recently discontinued
consumer electronics and cellular phone activations businesses decreased,
offsetting expenses were incurred due to the Company's refocusing of its efforts
towards the build-out of its PCS licenses and provision of digital wireless
services. Also included in the SGA for the three months ended March 31, 1998 are
the following items: (a) Acceleration of unamortized deferred marketing cost in
the amount of $330,000, which resulted from the completion of services under the
Marketing Service Contract by and between the Company and Great Deals Inc.,
dated September 4, 1996. (b) A charge to bad debt expense in the amount of
$368,000 as a result of the Company's re-evaluation of its outstanding accounts
receivable balances.
LIQUIDITY AND CAPITAL RESOURCES
Since its formation through March 31, 1998, the Company has financed its
operations and met its capital requirements primarily through the use of its
cash flow from capital investments, including the issuance of convertible
debentures and preferred stock.
The Company incurred net losses of $10,480,393 and $6,031,090 for fiscal year
ended March 31, 1998 and year ended December 31, 1996, respectively. The Company
attributes a portion of the increase in net loss of $4,449,303 to an increase in
interest expense of approximately $3,700,000 for the year ended March 31, 1998
as compared to the year ended December 31, 1996. Of the $3,700,000 increase,
$2,130,144 is attributable to non-cash interest expense associated with the
issuance of the 8% convertible debentures and
<PAGE>
$965,000 associated with the issuance of the Series C Preferred Stock and the
related $500,000 of Notes Payable (see Notes 7, 11, and 5(F)), respectively).
See the Results of Operations section for further discussion of interest
expenses. Also included in the net loss for fiscal year ended March 31, 1998 are
non-cash charges of approximately $1,222,000 relating to non-recurring charges
to salary expense, accelerated amortization of deferred marketing costs and
charge to bad debt expense, as discussed in further detail above in "Results of
Operations."
The Company has a working capital deficiency of $752,259 for fiscal year ended
March 31, 1998 as compared to a working capital deficiency of $3,582,906 at
March 31, 1997.
Net cash used in operating activities for the year ended March 31, 1998 was
$4,249,713 compared to $504,514 for the three months ended March 31, 1997 and
$1,728,503 for the year ended December 31, 1996.
Net cash used in investing activities for the fiscal year ended March 31, 1998
was $139,689 compared to $349,175 for the three months ended March 31, 1997 and
$746,413 for the year ended December 31, 1996.
Net cash provided by the financing activities for the year ended March 31, 1998
was $6,108,172 compared to $723,121 for the three months ended March 31, 1997
and $2,636,104 for the year ended December 31, 1996. During the fiscal third
quarter the Company issued 45 shares of new Series C Convertible Preferred Stock
and received $3,897,500 net of $602,500 in expenses. The Company also issued a
total of $500,000 10% one year convertible notes. The proceeds of these
offerings were used to repay past due indebtedness and a loan in the amount of
$105,000 made by a director of the Company with the balance being added to
working capital.
On December 31, 1996, the Company had working capital deficit of $3,956,977, as
compared to working capital of $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 March 31, 1998 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 continued to incur net losses with a net loss of $10,480,393 for
the year ended March 31, 1998. The Company has a working capital deficiency of
$752,259 at March 31,1998 and its cash used by operations during fiscal year
ended March 31, 1998 was $4,235,680. If cash flows from operations were assumed
to be the same for the fiscal year 1999 as 1998, the Company would continue to
have a working capital deficiency. Recognizing that the Company must generate
additional resources or consider modifying operations to enable it to continue
operations with available resources, management has retained a public relations
firm and certain other independent consultants to assist it in taking steps to
minimize this cash shortfall and to assist it in identifying entities interested
in its business. However, no assurances can be given that the efforts of the
Company or that of its consultants will be successful in raising additional
capital. Furthermore, there can be no assurance, assuming the Company raises
additional funds, that the Company will achieve profitability or positive cash
flow. If the Company is unable to obtain adequate additional financing, the
Company may be required to seek bankruptcy protection from its creditors.
YEAR 2000 ISSUE
Many existing computer programs use only two digits to identify a year in the
date field. These programs were designed and developed without considering the
impact of the upcoming change in the century. If not corrected, many computer
applications could fail or create erroneous results by or at the Year 2000. The
Year 2000 issue affects virtually all companies and organizations. The Company
has reviewed its existing computer programs and it believes that it will not be
adversely affected by the Year 2000 Issue. However, there can be no assurance
that the Company's suppliers, creditors, customers and financial service
organizations may not be adversely affected by the Year 2000 issue and as a
result, there can be no assurance as to the impact of the Year 2000 issue on the
Company.
<PAGE>
Electronic Communications Corp; (iv) effects of and changes in current FCC rules
and regulations; (v) difficulties or delays in realizing improved results from
business consolidations and in realizing gains from the sale of certain assets
held for sale; and (vi) insolvency of any potential joint venture partners.
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC. (FORMERLY ELECTRONICS COMMUNICATIONS CORP.)
AND SUBSIDIARIES
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
INDEX OF FINANCIAL INFORMATION
Report of Independent Accountants
Consolidated Balance Sheets as of March 31, 1998 and 1997
Consolidated Statements of Operations for the year ended March 31, 1998, the
three months ended March 31, 1997 and the year ended December 31, 1996
Consolidated Statements of Cash Flows for the year ended March 31, 1998, the
three months ended March 31, 1997 and the year ended December 31, 1996
Consolidated Statement of Changes in Stockholders' Equity for the year ended
March 31, 1998, the three months ended March 31, 1997 and the year ended
December 31, 1996
Notes to Consolidated Financial Statements
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the board of Directors and Stockholders
of Northeast Digital Network, Inc. and Subsidiaries
We have audited the consolidated balance sheets of Northeast Digital Network,
Inc. (formerly Electronics Communications Corp.) and Subsidiaries as of March
31, 1998 and 1997, and the related consolidated statements of operations, and
cash flows for the year ended March 31, 1998 and the three months ended March
31, 1997. These financial statements are the responsibility of the Company's
statements based on our audits. The Company's consolidated financial statements
for the year ended December 31, 1996 were audited by other auditors whose
report, dated February 17, 1997, expressed an unqualified opinion on those
statements and included an explanatory paragraph that described the uncertainty
concerning the company's ability to continue as a going concern.
We conducted our audits in accordance with generally accepted accounting
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 presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, based in our audits for 1998 and 1997, the consolidated
financial statements present fairly, in all material respects, the financial
position of Northeast Digital Network, Inc. and subsidiaries as of March 31,
1998 and 1997, and the results of their operations and their cash flows for the
year ended March 31, 1998 and the three months ended March 31, 1997 in
conformity with generally accepted accounting principles.
The 1998 and 1997 consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 16 to
the consolidated financial statements, the Company's operating losses during the
past several years and deficit in working capital at March 31, 1998 raise
substantial doubt about its ability to continue as a going concern. Management's
plans concerning these matters are also described in Note 16. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ WISS & COMPANY, LLP
------------------------------
WISS & COMPANY, LLP
Livingston, New Jersey
July 3, 1998
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
---------------------------------------------------
To the Stockholders
Northeast Digital; Networks, Inc
(formerly Electronics Communications Corp.)
We have audited the accompanying consolidated statements of operations and cash
flows of Northeast Digital Networks, Inc. (formerly Electronics Communications
Corp). for the year ended December 31, 1996. 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 results of their operations and their
cash flows of Northeast Digital Networks Inc. (formerly Electronic
Communications Corp.) for the year ended December 31, 1996 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 16 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 16. The financial statement 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
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC. (FORMERLY ELECTRONICS COMMUNICATIONS CORP.)
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS MARCH 31,
---------
1998 1997
---- ----
CURRENT ASSETS:
Cash $1,767,930 $48,620
Accounts Receivable
(Net of $71,000 Allowance
for Doubtful Accounts at
March 31, 1998 and
$504,000 at March 31, 1997) 62,217 685,709
Inventories -- 256,698
Loan Receivable -- 114,560
Prepaid Expenses 21,071 6,158
------------ ------------
TOTAL CURRENT ASSETS 1,851,218 1,111,745
------------ ------------
PROPERTY AND EQUIPMENT:
Property and Equipment 1,686,122 2,794,870
Accumulated Depreciation (649,732) (778,502)
------------ ------------
NET PROPERTY AND EQUIPMENT: 1,036,390 2,016,368
------------ ------------
OTHER ASSETS:
PCS Licenses 22,300,351 20,423,459
Marketing Service Contract -- 1,027,911
Deferred Registration Costs
and Loan Origination Fees 13,701 374,052
Paging System Costs 676,614 962,835
Deferred Private Placements Costs -- 347,971
Debt Issue Cost 1,020,000 --
Security Deposits and Other Assets 113,965 190,404
------------ ------------
TOTAL OTHER ASSETS 24,124,631 23,326,632
------------ ------------
TOTAL ASSETS $ 27,012,239 $ 26,454,745
============ ============
See Notes to Consolidated Financial Statements.
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC. (FORMERLY ELECTRONICS COMMUNICATIONS CORP.)
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY MARCH 31,
1998 1997
---- ----
CURRENT LIABILITIES:
<S> <C> <C>
Accounts Payable and Accrued Expenses $1,316,606 $2,996,649
Notes Payable - Other 795,677 795,000
Current Portion of Long Term Debt 332,524 336,073
Current Portion of FCC Note Payable 158,670 566,929
----------- -----------
TOTAL CURRENT LIABILITIES 2,603,477 4,694,651
----------- -----------
LONG TERM LIABILITIES:
Notes Payable to Stockholders -- 92,215
Private Placement Advance -- 1,628,254
Notes Payable to FCC 18,760,307 16,523,016
Long Term Debt 1,087,345 875,556
----------- -----------
TOTAL LONG TERM LIABILITIES 19,847,652 19,119,041
----------- -----------
MINORITY INTEREST -- 424,542
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $.01 per share, 8,000,000
authorized, 4,000,000 Series B Non-Voting
Convertible Shares issued and outstanding at
March 31, 1997 -- 40,000
Preferred Stock, no par value, 45 authorized
Series C Non-voting Convertible 45 Shares issued and
outstanding at March 31, 1998 and -0- at March 31, 1997 -- --
Common Stock, par value $.60 per share, 40,000,000
authorized, 5,531,705 issued and outstanding
at March 31, 1998 and 1,019,187 at March 31, 1997 3,375,845 609,460
Additional Paid-In Capital 24,443,726 18,295,820
Accumulated Deficit (21,203,461) (10,723,068)
Discount on Common Stock available to
Series C Preferred Shareholders (2,055,000) --
Subscription Receivable -- (6,000,000)
Notes Receivable arising from
Common Stock Purchase Warrants Sold -- (5,701)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 4,561,110 2,216,511
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $27,012,239 $26,454,745
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC. (FORMERLY ELECTRONICS COMMUNICATIONS CORP.)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three
Year Ended Months Ended Year Ended
March 31, 1998 March 31, 1997 December 31, 1996
-------------- -------------- -----------------
REVENUES:
<S> <C> <C> <C>
Paging & Two Way Radio 2,143,357 $561,441 $984,851
Commissions 192,051 227,732 3,394,444
Electronics 430 76,115 2,978,142
------------ ----------- -----------
TOTAL SALES 2,335,838 865,288 7,357,437
------------ ----------- -----------
COST OF SALES:
Paging & Two Way Radio 2,053,890 361,296 445,808
Commissions 275,562 282,217 2,851,363
Electronics 389,275 74,593 2,895,598
------------ ----------- -----------
TOTAL COST OF SALES 2,718,727 718,106 6,192,769
------------ ----------- -----------
GROSS PROFIT (LOSS) (382,889) 147,182 1,164,668
------------ ----------- -----------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Selling 1,428,703 303,323 2,092,053
General and Administrative 5,012,913 1,530,309 4,896,340
------------ ----------- -----------
TOTAL SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 6,441,616 1,833,632 6,988,393
------------ ----------- -----------
INCOME (LOSS) FROM OPERATIONS (6,824,505) (1,686,450) (5,823,725)
------------ ----------- -----------
OTHER (INCOME) EXPENSE:
Interest Expense 3,911,291 59,292 206,060
Interest Income (20,199) (2,964) (17,200)
Loss on Disposal of Fixed Assets 329,911 -- --
Loss on Termination of Leases 60,449 -- --
------------ ----------- -----------
TOTAL OTHER (INCOME) EXPENSE 4,281,452 56,328 188,860
------------ ----------- -----------
LOSS BEFORE MINORITY INTEREST AND EXTRAORDINARY INCOME (LOSS) (11,105,957) (1,742,778) (6,012,585)
------------ ----------- -----------
Minority Interest in Gain (Loss) of Consolidated Subsidiaries 68,777 (1,661) 55,264
------------ ----------- -----------
NET LOSS BEFORE EXTRAORDINARY INCOME (11,037,180) (1,744,439) (5,957,321)
Extraordinary Income (Loss) 556,787 -- (73,769)
------------ ----------- -----------
Net Loss $(10,480,393) $(1,744,439) $(6,031,090)
------------ ----------- -----------
Loss per Common Share $(4.33) $(0.14) $(1.13)
------ ------ ------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC. (FORMERLY ELECTRONICS COMMUNICATIONS CORP.)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended Three Months Ended Year Ended
March 31, 1998 March 31, 1997 December 31, 1996
-------------- -------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net Loss $(10,480,393) $(1,744,439) $(6,031,090)
Adjustments to Reconcile Net Loss to
Net Cash Used By Operations:
Issue of Common Stock for Marketing Agreement -- -- 187,500
Issuance of Common Stock for Services 578,971 -- --
Legal Fees Financed with Stockholder N/P 188,000 -- --
Disposal of Pagers to Customers 292,500 -- --
Debt Forgiveness Income (556,787) -- --
Loss on Disposal of Fixed Assets 324,687 (45,381) --
Loss on Termination of Leases 60,449 -- --
Depreciation and Amortization 305,464 149,609 2,447,967
Provision for Bad Debts 349,733 -- 493,923
Non-cash Amortization 383,419 518,411 --
Non-cash Finance Charges 3,781,280 -- --
Marketing Service Contracts 1,027,911 177,226 --
Minority Interest in Loss (Income) (68,777) 9,068 (55,264)
Changes in:
Accounts Receivable 388,319 (8,912) 759,366
Inventories 256,698 (68,745) 217,613
Prepayments (14,913) 6,004 55,024
Accounts Payable and Accrued Expenses (1,123,256) 466,052 183,584
Accrued Interest -- -- 14,000
Security Deposits and Other 56,982 36,593 (1,126)
------------ ----------- -----------
TOTAL ADJUSTMENTS 6,230,680 1,239,925 4,302,587
============ =========== ===========
NET CASH USED IN OPERATING ACTIVITIES (4,249,713) (504,514) (1,728,503)
============ =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC. (FORMERLY ELECTRONICS COMMUNICATIONS CORP.)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended Three Months Ended Year Ended
March 31, 1998 March 31, 1997 December 31, 1996
-------------- -------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
<S> <C> <C> <C>
Unrestriction of Cash $ -- $ -- $1,100,000
Paging System Costs 16,250 17,187 725,580
PCS License (47,860) (366,362) (1,645,220)
Additions to Property and Equipment (108,079) -- (726,140)
Payment for purchase of Threshold Communications, Inc.
net of cash acquired -- -- (158,511)
Deferred License Costs -- -- (42,122)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (139,689) (349,175) (746,413)
CASH FLOWS FROM FINANCING ACTIVITIES
Notes Receivable Arising From Common
Stock Purchase Warrants -- -- 53,300
Loan Receivable -- -- (8,000)
Deferred Private Placement Costs -- (110,728) (11,456)
Payment for Deferred Registration Costs -- -- (84,176)
Net Proceeds (Payments) of Shareholder Loans 310,396 (89,462) (70,330)
Proceeds of Other Loans -- -- 703,538
Private Placement Advance -- 1,128,254 500,000
Payments of Bank Loans (95,000) -- (1,130,000)
Proceeds from Debentures 2,244,339 -- 2,234,376
Proceeds from sale of 10% one year convertible notes 518,110 -- --
Principal payments of Capital Lease Obligations (244,997) (63,262) --
Proceeds from Sale of Common Stock 279,839 -- 570,976
Proceeds from Sale of Series C Preferred Stock 3,897,500 -- --
Payments of Long Term Debt (801,475) (141,681) (122,124)
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 6,108,712 723,121 2,636,104
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 1,719,310 (130,568) 161,188
----------- ----------- -----------
CASH, BEGINNING OF PERIOD 48,620 179,188 18,000
----------- ----------- -----------
CASH, END OF PERIOD $1,767,930 $48,620 $179,188
========== ======= ========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC. (FORMERLY ELECTRONICS COMMUNICATIONS CORP.)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months
Year Ended Ended Year Ended
March 31, 1998 March 31, 1997 December 31, 1996
-------------- -------------- -----------------
SUPPLEMENTAL DISCLOSURE FOR CASH FLOWS
CASH PAID DURING THE PERIOD FOR:
<S> <C> <C> <C>
Interest $130,311 $59,292 $206,060
Taxes -- -- --
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Property Acquired Under Capital Lease -- -- 970,315
Common Stock Issued for Payment of Loan Payable 407,000 -- 271,500
Exchange of Common Stock for Convertible Debt 1,908,093 -- 2,234,676
Recission of Preferred Stock 6,000,000 -- --
Exchange of Convertible Debt for Common Stock 4,400,000 -- --
Retirement of Warrants and Notes Receivable 5,701 -- --
EITF D-60 Convertible Debt Valuation (Note 6(F)) 506,000 -- --
SFAS No. 123 Deferred Expense for
Warrants Issued (Note 6(F)) -- --
1,111,000 -- --
Discount on Common Stock available to
Series C Preferred Shareholders
Under EITF D-60 2,423,000 -- --
Reclassification of Unamortized Debt Issue
Cost Associated with 8% Converted
Debentures upon Conversion to Common Stock 312,000 -- --
Adjustment of TCI Acquisition 278,000 -- --
Fair Value of Debt Assumed in
Connection with Acquisition
Of PCS Licenses -- -- 16,176,673
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
Private Placement Proceeds
Advance Reclassification
for Common Stock Sale 1,628,000 -- --
Non Cash interest capitalized
on FCC Note 1,829,000 248,000 --
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC. (FORMERLY ELECTRONICS COMMUNICATIONS CORP.)
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit
------ ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1995 -- -- 253,731 $150,186 $5,320,629 ($2,947,539)
Payment of Loan for
Purchase B Warrants -- -- -- -- -- --
Sale of Common Stock -- -- 5,786 3,472 152,812 --
Issuance of Common Stock for
Settlement of
Potential Litigation -- -- 2,893 1,736 72,033 --
Warrants Issued in Connection
with Loan Agreements -- -- -- -- 500,000 --
Sale of Common Stock -- -- 41,667 25,000 506,250 --
Shares Issued in
Connection with
Marketing Agreement -- -- 8,333 5,000 182,500 --
Shares Issued in Connection
with Consulting Agreement -- -- 191,667 115,000 1,322,500 --
Shares Issued in Connection
with Acquisition -- -- 16,208 9,725 379,275 --
Conversion of Debentures -- -- 475,569 285,341 2,924,220 --
Sale of Preferred Stock 4,000,000 40,000 -- -- 5,960,000 --
Shares Issued in Connection
with Debt Agreements -- -- 23,333 14,000 975,601 --
Net Loss (6,031,090) (6,031,090)
--------- --------- --------- -------- ----------- ------------
Balance as of December 31, 1996 4,000,000 $40,000 1,019,187 $609,460 $18,295,820 ($8,978,629)
Net loss -- -- -- -- -- (1,744,439)
--------- ------- --------- -------- ----------- -----------
Balance as of March 31, 1997 4,000,000 $40,000 1,019,187 $609,460 $18,295,820 ($10,723,068)
============ ============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Notes Discount on
Receivable Common
Arising From Stock
Common Stock Available To
Purchase Preferred Subscription
Warrant Shareholders Receivable Total
------------ -------------- -------------- -----
<S> <C> <C> <C> <C>
Balance as of December 31, 1995 $(59,001) -- -- $2,464,275
Payment of Loan for
Purchase B Warrants 53,300 -- -- 53,300
Sale of Common Stock -- -- -- 156,284
Issuance of Common Stock for
Settlement of
Potential Litigation -- -- -- 73,769
Warrants Issued in Connection
with Loan Agreements -- -- -- 500,000
Sale of Common Stock -- -- -- 531,250
Shares Issued in
Connection with
Marketing Agreement -- -- -- 187,500
Shares Issued in Connection
with Consulting Agreement -- -- -- 1,437,500
Shares Issued in Connection
with Acquisition -- -- -- 389,000
Conversion of Debentures -- -- -- 3,209,561
Sale of Preferred Stock -- -- (6,000,000) --
Shares Issued in Connection
with Debt Agreements
Net Loss -- -- -- (9,896,055)
----------- ----------- ----------- -----------
Balance as of December 31, 1996 $(5,701) -- $(6,000,000) $3,960,950
Net loss -- -- -- (1,744,439)
----------- ----------- ----------- -----------
Balance as of March 31, 1997 $(5,701) $ -- $(6,000,000) $2,216,511
=========== =========== =========== ===========
</TABLE>
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC. (FORMERLY ELECTRONICS COMMUNICATIONS CORP.)
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - (CONTINUED)
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Paid-in
Shares Amount Shares Amount Capital
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Balance As Of March 31, 1997
(from previous page) 4,000,000 $ 40,000 1,019,187 $ 609,460 $ 18,295,820
========= ======== ========= ========= ============
Sale of Common Stock
in connection with
Private
Placement net of $562,239
of expenses -- -- 205,861 $123,516 $1,784,577
Issuance of common stock
for consulting services -- -- 50,000 30,000 101,500
Exchange of Common Stock
and Warrants into 8%
Cumulative Convertible Debentures -- -- (205,861) (123,516) (1,784,577)
Valuation of Discount
of Common Stock Available
to Holders of 8% Cumulative
Convertible Debentures -- -- -- -- 2,130,143
Valuation of Discount of
Common Stock to Holders of
10% One Year Promissory Notes -- -- -- -- 1,617,000
Rescission of Series B
preferred stock (4,000,000) (40,000) -- -- (5,960,000)
Conversion of 8% cumulative
convertible debentures into
common stock -- -- 3,939,442 2,422,539 1,977,795
Reclassification of
Unamortized Debt Issue
Cost
Associated with 8%
Converted Debentures upon
conversion to common stock -- -- -- -- (312,000)
Issuance of Common Stock
in exchange for loans,
subsidiary stock, Series B
Preferred stock and
employment agreements -- -- 523,076 313,846 556,236
Sale of Series C preferred
stock net of $602,500
of expenses 45 -- -- -- 3,897,500
Valuation of discount on
Common Stock available
to holders of Series C
Preferred Stock -- -- -- -- 2,423,000
Adjustment of TCI
Acquisition (277,567)
Retirement of Note
Receivable and Warrants (5,701)
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance as of March 31, 1998 -- -- 5,531,705 $3,375,845 $24,443,726
============ ============ ============ ============ ============
</TABLE>
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC. (FORMERLY ELECTRONICS COMMUNICATIONS CORP.)
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - (CONTINUED)
<TABLE>
<CAPTION>
Notes Discount on
Receivable Common
Arising From Stock
Common Stock Available To
Accumulated Purchase Preferred Subscription
Deficit Warrant Shareholders Receivable Total
------------ ------------ -------------- -------------- -----
<S> <C> <C> <C> <C> <C>
Balance As Of March 31, 1997
(from previous page) ($10,723,068) $(5,701) $ -- $(6,000,000) $ 2,216,511
============= ======== ========= =========== ===========
Sale of Common Stock
in connection with
Private
Placement net of $562,239
of expenses -- -- -- -- $1,908,093
Issuance of common stock
for consulting services -- -- -- 131,500
Exchange of Common Stock
and Warrants into 8%
Cumulative Convertible Debentures -- -- -- -- (1,908,093)
Valuation of Discount
of Common Stock Available
to Holders of 8% Cumulative
Convertible Debentures -- -- -- -- 2,130,143
Valuation of Discount of
Common Stock to Holders of
10% One Year Promissory Notes -- -- -- 1,617,000
Rescission of Series B
preferred stock -- -- -- 6,000,000 --
Conversion of 8% cumulative
convertible debentures into
common stock -- -- -- -- 4,400,334
Reclassification of
Unamortized Debt Issue
Cost
Associated with 8%
Converted Debentures upon
conversion to common stock -- -- -- -- (312,000)
Issuance of Common Stock
in exchange for loans,
subsidiary stock, Series B
Preferred stock and
employment agreements -- -- -- -- 870,082
Sale of Series C preferred
stock net of $602,500
of expenses -- -- -- -- 3,897,500
Valuation of discount on
Common Stock available
to holders of Series C
Preferred Stock -- -- (2,055,000) -- 368,000
Adjustment of TCI
Acquisition -- -- -- (277,567)
Retirement of Note
Receivable and Warrants -- 5,701 -- --
Net loss (10,480,393) -- -- -- (10,480,393)
------------ ----------- ------------ ------------ ------------
Balance as of March 31, 1998 $(21,203,461) $ -- $(2,055,000) $ -- $4,561,110
============ =========== ============= ============ ============
</TABLE>
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC. (FORMERLY ELECTRONICS COMMUNICATIONS CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Business Activity and Basis of Presentation
In June of 1998, Northeast Digital Networks, Inc. (the "Company") changed its
name from Electronics Communications Corp. During 1994, Electronics
Communications Corp. 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
engaged in the wholesale distribution of cellular telephones and related
accessories and electronic products) and Trade Zone Distributors, Inc. (which
engaged in the activation of cellular radio subscribers for commissions), both
serving the New York Metropolitan Area. The Company no longer distributes
cellular telephones and related accessories and electronic products nor does it
engage in the activation of cellular telephones for commissions.
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. The Company is presently
inactive. In July 1995, the Company formed Personal Communications Network, Inc.
("PCN"), a Delaware corporation, to participate in the Federal Communications
Commission ("FCC") auction for licenses to engage in personal communications
services ("PCS"). On May 8, 1996 the Company obtained six PCS licenses for
$26,452,200 entitling it to operate wireless PCS telephone systems covering
nearly 1.5 million people in five states. On June 8, 1998, the Company elected a
debt relief option (the "Disaggregation Option") offered by the FCC. The
election of the Disaggregation Option for all six licenses permitted the return
of 15 MHz of the 30 MHz originally awarded the Company in exchange for a
reduction of the debt incurred for such licenses (see Note 3). In February 1997,
four (4) officers and directors and the wife of a director of the Company
acquired a 24% interest in "PCN". See Note 19 as to the Company's acquisition of
this 24% interest in PCN. As a result, PCN is now 100% owned by the Company.
On March 22, 1996, Threshold Communications, Inc. ("TCI") acquired substantially
all of the assets and assumed certain liabilities of General Communications and
Electronics, Inc. ("GCE"). GCE is in the business of reselling paging air time
to corporate clients. 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. During the last quarter of fiscal 1998, GTA ceased
all operations.
On June 28, 1996, the Company acquired 51% of Threshold Communications, Inc. On
January 2, 1998, the Company purchased the remaining 49% of TCI for a $90,000
cash payment.
On July 31, 1997 the Company's board of directors effected a 1 for 12 reverse
stock split of its $.05 par value common stock. The new common stock has a $.60
per share par value. On May 28, 1998, the Company's stockholders ratified the
reverse stock split at a special meeting of stockholders. All references to
number of common shares for all periods presented reflects the ratification and
have been retroactively restated for the reverse stock split.
On August 11, 1997 the Company changed its fiscal year end from December 31 to
March 31, therefore, the accompanying financial statements include transitional
financial statements for the three months ended March 31, 1997. Accordingly,
unaudited financial data for the three months ended March 31, 1996 follow:
Sales $2,263,526
===========
Gross Profit $546,275
===========
Net Loss $(108,130)
===========
Net Loss Per Share $(0.04)
===========
(B) Principles of Consolidation
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC. (FORMERLY ELECTRONICS COMMUNICATIONS CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
The consolidated financial statements include the accounts of the Company, its
wholly owned subsidiaries, Free Trade Distributors, Inc., Trade Zone
Distributors, Inc., Personal Communications Network, Inc., Threshold
Communications, Inc. and majority owned 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
straight line and accelerated methods over the estimated useful lives of the
respective assets (5 to 7 years).
(D) Inventories
Inventories are valued at the lower of cost or market, cost is determined using
the first in, first out method.
(E) Revenue Recognition
It is the Company's policy to categorize revenue into either (i) sales of its
radio paging and two way radio services, (ii) commissions for fees earned on
sales of cellular radio service contracts, and (iii) sales of electronic goods.
Sales of electronic goods are recognized when they are shipped.
Commissions are inclusive of fees earned for the sale of cellular telephone
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 telephone service supplier and are paid on customer usage for a maximum
of three years.
The Company established a reserve of 3.5% for charge-backs on customers that
prematurely terminate cellular service. In addition to the commissions paid by
the cellular telephone supplier, the Company receives co-op fees. Co-op fees are
reimbursements of expenditures that are approved by the cellular telephone
supplier for advertising and promotion in connection with the sale of cellular
telephone contracts.
Revenues from paging and two-way radio services are recognized in the beginning
of the month for which they are invoiced.
(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. Uninsured balances at March
31, 1998 totaled approximately $1,778,000.
(G) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the period. Actual results
could differ from those estimates.
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC. (FORMERLY ELECTRONICS COMMUNICATIONS CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
(H) Fair Value of Financial Instruments
At March 31, 1998 and March 31, 1997, the fair values of cash, accounts
receivable, non-convertible short term debt and current portion of long-term
debt and accounts payable, approximated their carrying values because of the
short-term nature of these instruments. The fair value and carrying amount of
the Company's long term notes payable to the FCC with an actual interest rate of
7% and the corresponding PCS Licenses were adjusted to reflect an imputed
interest rate of 14% which more closely corresponds to the Company's borrowing
rate.
(I) Earnings Per Share
The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standard (SFAS) No. 128, "Earnings Per Share" which was
issued in February 1997 and is effective for periods ending after December 15,
1997. SFAS No. 128 replaces the presentation of primary and fully diluted
earnings per share. The Company uses the weighted-average number of common
shares outstanding during each period to compute basic earnings per common
share. Diluted earnings per share is computed using the weighted-average number
of common shares and dilutive potential common shares outstanding. Dilutive
potential common shares are additional common shares assumed to be exercised.
(J) Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25) and related interpretations in
accounting for its employee stock options. Under APB 25, because the exercise
price of employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recorded. The Company has
adopted the disclosure-only provisions of SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION.
(K) Reclassifications
Certain amounts from previous periods have been reclassified to conform to the
1998 presentation.
NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS
Effective with the first quarter of fiscal 1999, the Company will adopt SFAS No.
130, "Reporting Comprehensive Income" which was issued in June 1997 and is
effective for fiscal years beginning after December 15, 1997. SFAS No. 130
establishes the standards for reporting and displaying comprehensive income and
its components (revenues, expenses, gains and losses) as part of a full set of
financial statements. This statement requires that all elements of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. Since this standards applies only to
the presentation of comprehensive income, it will not have any impact on the
Company's results of operations, financial position or cash flows.
Beginning with the 1999 annual report, the Company will also adopt SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information" which was
issued in July 1997 and is effective for fiscal years beginning after December
15, 1997. SFAS No. 131 establishes the standards for the manner in which public
enterprises are required to report financial and descriptive information about
their operating segments. This standard defines operating segments as components
of an enterprise for which separate financial information is available and
evaluated regularly as a means for assessing segment performance and allocating
resources to segments. A measure of profit or loss, total assets and other
related information are required to be disclosed for each operating segment. In
addition, this standard requires the annual disclosure of: information
concerning revenues derived from the enterprise's products or services;
countries in which it earns revenue or holds assets, and major customers.
NOTE 3 - PCS LICENSES
(A) The PCS licenses were awarded in a Federal Communications Commission ("FCC")
"C" Block Auction. The markets awarded the Company include Elmira-Corning, New
York; Bangor/Lewiston-Auburn/Waterville- Augusta, Maine; and
Burlington/Rutland-Bennington, Vermont. The Vermont markets encompass virtually
the entire state.
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC. (FORMERLY ELECTRONICS COMMUNICATIONS CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
NOTE 3 - PCS LICENSES - (CONTINUED)
The Company's total winning bids amounted to $26,452,200, after the 25% discount
provided to small businesses, for which the Company qualified under the terms of
the auction. The Company deposited cash of $2,645,220. The remaining balance is
payable over the next 10 years with 7% interest only during the first six years.
On March 31, 1997, the FCC imposed a moratorium on the payment of interest until
March 31, 1998. On March 24, 1998, the FCC released an Amendment of the
Commission's Rules Regarding Installment Payment Financing for Personal
Communications Services (PCS) Licensees, WT Docket 97-82, Order on
Reconsideration of the Second Report and Order whereby the moratorium on the
payment of interest was extended to July 31, 1998. Included in the license costs
are certain legal fees incurred in obtaining the license. Capitalized PCS
interest in the amount of $2,233,418 is included in PCS Licenses at March 31,
1998 and $566,929 at March 31, 1997 and represents interest capitalized in
conjunction with these licenses. The Company has not begun PCS service and will
require substantial additional financing to pay the balance of the purchase
price for the PCS licenses and to construct the system prior to initiating PCS
service. No assurance can be given that such financing will become available.
Assuming inception of PCS services, the Company will amortize the licenses and
related costs over a forty-year period.
See Note 20(B) regarding the Company's election of the Disaggregation Option.
NOTE 4 - CONSULTING SERVICE CONTRACT
(A) In July 1997, the Company entered into a Consulting Agreement with an
unaffiliated financial advisory firm. Pursuant to the terms of this agreement,
the firm was hired as a financial advisory consultant to provide promotional and
specialty and management consulting services to the Company. In consideration of
the services to be performed by the firm, the Company issued 50,000 shares to
the firm pursuant to a Registration Statement filed with the SEC on Form S-8. As
of March 31, 1998, the financial advisory firm had completed all of its
obligations under the agreement. As a result, the balance of $65,750 was
expensed during the quarter.
(B) 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 was 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 and recorded a
prepaid asset of $1,437,500. The above transaction resulted in non cash expense
of $1,027,911 for the year ended March 31, 1998, $177,226 for the three months
ended March 31, 1997 and $232,363 for the year ended December 3, 1996. During
the last quarter of fiscal 1998, the Company expensed the remaining prepaid
balance of $496,233 as the public relations firm had completed all of its
obligations under the agreement.
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC. (FORMERLY ELECTRONICS COMMUNICATIONS CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
March 31,
1998 1997
----------- -----------
Paging equipment $1,619,250 $2,069,250
Computer and other equipment 47,917 646,331
Leasehold improvements,
furniture and fixtures 18,955 79,289
--------- ---------
1,686,122 2,794,870
Less: Accumulated depreciation
and amortization (649,732) (778,502)
--------- ---------
$1,036,390 $2,016,368
=========== ==========
NOTE 6 - NOTES PAYABLE
(A) NOTES PAYABLE - FCC
Notes Payable - FCC consist of six 7% 10 year notes aggregating $23,806,980
($16,685,559 when discounted using the imputed interest rate of 14% - see Note
1(H)). Accrued interest as of March 31, 1998 amounted to $2,233,418 for a total
obligation of $18,918,977 of which $158,670 is current. Accrued interest as of
March 31, 1997 amounted to $566,929 for a total obligation of $17,089,945 of
which $566,929 is current. The notes are payable in quarterly installments of
interest only for the first six years and principal plus interest thereafter.
The notes are secured by the PCS licenses. The interest payment due December 31,
1996 was partially paid on March 31, 1997. The Company has not made a quarterly
interest payment since March 31, 1997. This non-payment is due to an FCC
moratorium on quarterly interest payments. See Note 20(B) for further discussion
of debt reduction resulting from the Company's election of the Disaggregation
Option.
(B) NOTES PAYABLE - OTHER
(1) On April 18, 1995, the Company entered into a financing agreement with a
bank in the amount of $100,000. This loan was personally guaranteed by the
Company's former President, cross corporate guaranteed by the Company's Free
Trade Distributors, Inc. subsidiary and secured by the Company's inventory.
Interest is payable monthly at the rate of 1.5% per annum in excess of the
bank's fluctuating prime lending rate. As of March 31, 1997, the balance of this
loan was $95,000. The balance of the loan was paid in full on December 30, 1997.
(2) In connection with the Company's acquisition of the 51% interest in TCI, the
Company was contingently liable to pay the difference between the market value
at the date of acquisition of the Company's common stock used as consideration
for a portion of the acquisition price and the average market price of the
Company's stock during the period in which a restriction on the resale of the
stock expired. This resulted in the recognition of an obligation for $277,567 as
of March 31, 1998.
(3) On September 20, 1996, the Company borrowed $500,000 for working capital
purposes from an unaffiliated private lender. In consideration for the loan, the
Company issued 16,667 shares of common stock and "Class A" warrants exercisable
to purchase 33,334 shares of common stock at $27 per share (subsequently reduced
to $2.25 per share) to the lender. The loan bore interest at the rate of 10% per
annum and was due and payable on June 20, 1997. The Company obtained an
extension of the due date and in July, 1997, paid $125,000 of this indebtedness.
The $375,000 balance together with accrued interest of
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC. (FORMERLY ELECTRONICS COMMUNICATIONS CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - NOTES PAYABLE - (CONTINUED)
$33,334 was exchanged by the lender for units in the Company's above described
April, 1997 Private Placement. These units were subsequently exchanged by the
lender for $408,334 in principal amount of the Company's 8% Cumulative
Convertible Debentures in connection with the Company's August, 1997 Private
Placement.
(4) On October 21, 1996 the Company borrowed $200,000 for working capital
purposes from an unaffiliated private lender. In consideration for the loan, the
Company issued 6,667 shares of common stock and "Class A" warrants exercisable
to purchase 13,334 shares of common stock at $27 per share (subsequently reduced
to $2.25 per share) to the lender. The loan bore interest at the rate of 10% per
annum and was due and payable in November, 1997. The loan was secured by a lien
on the Company's receivables and equipment and was repaid in full in June, 1997.
(5) During the 1998 fiscal third quarter, the Company borrowed $300,000 from one
lender and $200,000 from a lender affiliated with the Placement Agent of the
Company's August 1997 Regulation S Private Placement Offering of debentures (See
Note 7) and of its December 1997 Regulation S Private Placement Offering of
shares of its 1997 Series C Preferred Stock (see Note 11). The Company agreed to
issue its 10% promissory notes to the lenders in the principal amounts of the
loans. The notes are payable one year after the loans together with interest at
a 10% annual rate payable semi-annually in cash, or at the Company's option, in
shares of Common Stock. Accrued interest on these notes was $18,110 as of March
31, 1998. The note principal is convertible at the holder's option into shares
of Common Stock at a conversion price equal to the lesser of $1.125 per share or
a Conversion Formula similar to the Conversion Formula of the Series C Preferred
Stock. In accordance with EITF Bulletin D-60, the Company has recorded a debt
issue cost and a corresponding increase to additional paid in capital of
$506,000, representing the difference between the fair market value of the
Company's common stock on the date of the loan and the conversion price. The
cost is being amortized over the life of the loan. In addition, the Company has
agreed to issue five-year warrants to the lenders exercisable to purchase
100,000 shares of Common Stock for each $100,000 loan (i.e., an aggregate
500,000 shares of Common Stock) at an exercise price per share equal to 120% of
the closing bid price for such Common Stock on the trading day immediately
preceding the day of a particular loan. In accordance with SFAS No 123, the
Company has recorded a debt issue cost and a corresponding increase to
additional paid in capital of $1,111,000, representing the fair value of the
warrants on the date of grant. The fair value of the warrants were estimated
using the Black-Scholes option pricing model with the following weighted-average
assumptions: the risk free interest rate of 14%, dividend yield of 0.0%,
volatility factors of the expected market price of the Corporation's common
stock of 203.1% and a weighted-average expected life of the warrants of 5 years.
This cost is being amortized over the life of the loan.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected price volatility. Because the
warrants have characteristics significantly different from those of normal
publicly traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of the aforementioned warrants.
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC. (FORMERLY ELECTRONICS COMMUNICATIONS CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - PRIVATE PLACEMENT OF SECURITIES AND 8%
CUMULATIVE CONVERTIBLE DEBENTURES
In April 1997, the Company sold 205,861 units consisting of an aggregate 205,861
shares of Common Stock and Class A warrants exercisable to purchase an
additional aggregate 308,792 shares of Common Stock at an exercise price of
$60.00 per share (subsequently reduced to $2.25 per share). The units were sold
in a Private Placement to a number of unaffiliated investors for an aggregate
$2,470,334 including cash consideration of $2,061,999 and an exchange of Company
notes payable and accrued interest aggregating $408,334. The Company incurred
$562,239 of expenses in connection with the Private Placement. All of the
investors in this Private Placement subsequently exchanged their units for
Debentures in the August 1997 Private Placement Offering hereinafter described.
On August 7, 1997, the Company consummated a Regulation S Private Placement
Offering directed to non "United States Persons" pursuant to which the Company
sold $2,500,000 principal amount of the Company's 8% Cumulative Convertible
Debentures (the "Debentures"). The principal amount of the Debentures are
convertible into shares of the Company's common stock at the option of the
holder, commencing 41 days after issuance, at a price equivalent to a 30%
discount from market based upon the five (5) day average daily closing bid
price, as reported on NASDAQ, for the five (5) trading days immediately
preceding the applicable date of conversion. As a result of the Emerging Issues
Task Force ("EITF") Bulletin D-60, as promulgated by the Financial Accounting
Standards Board ("FASB"), the Company has recorded a finance charge and a
corresponding increase to Paid in Capital of $1,071,429 attributable to the sale
of the Convertible Debentures. The Debentures bear interest at the rate of 8%
per annum payable on August 7 of each year commencing August 7, 1998. The
Debentures are redeemable and callable for conversion under certain
circumstances and are due June 30, 2000. The Company paid a placement fee equal
to 10% of the gross proceeds and a 3% non-accountable expense allowance to the
Placement Agent.
At the same time but separate from the Regulation S Private Placement Offering,
$2,470,334 principal amount of the Debentures were offered to those persons who
subscribed to and participated in the Company's April 1997 Private Placement of
the units. Those investors were offered the opportunity to exchange all, but not
less than all, of their units for Debentures, on a dollar for dollar basis. As a
result, effective August 7, 1997, the holders of the April 1997 Private
Placement units exchanged their units for an aggregate $2,470,334 principal
amount of the 8% Convertible Debentures. The Debentures in this
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC. (FORMERLY ELECTRONICS COMMUNICATIONS CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - PRIVATE PLACEMENT OF SECURITIES AND 8%
CUMULATIVE CONVERTIBLE DEBENTURES - (CONTINUED)
separate offering are convertible at the option of the holder commencing 180
days after issuance. As a result of the EITF Bulletin D-60, the Company has
reduced the carrying value of the Debentures and recorded an increase in Paid In
Capital and a corresponding finance charge of $1,058,715 on the sale of these
convertible debenture.
As of March 31, 1998, $3,747,834 of the Debentures had been converted into
3,939,442 shares of the Company's common stock.
NOTE 8 - LONG-TERM DEBT
A summary of long-term debt follows:
INTEREST MARCH 31,
DESCRIPTION RATE 1998 1997
- ----------- ---- ---- ----
Convertible Debentures (Note 7) 8% 593,332 --
Installment notes payable
monthly through August 1999 (a) 12% 151,300 243,695
Capital leases (b) Various 675,237 967,934
------------ ----------
1,419,869 1,211,629
Less: Current maturities 332,524 336,073
------------ ----------
$1,087,345 $ 875,556
========== =========
(a) In connection with TCI'S acquisition of GCE, the Company assumed a $350,000
non-interest bearing note. The outstanding principal amount of this non-interest
bearing note was $165,278 and $281,944 at March 31, 1998 and March 31, 1997,
respectively, less unamortized discount (discount is based on interest of 12%)
for a net balance of $151,300 and $243,695, respectively.
(b) The obligations under capital leases are collateralized by paging equipment
with a book value of $643,503 as of March 31, 1998. The interest rates on the
capitalized leases range from 10% to 25% and are imputed based on the lower of
the Company's incremental borrowing rate at the inception of each lease or the
lessor's implicit rate of return.
Long-term debt at March 31, 1998 matures as follows:
YEAR ENDING MARCH 31:
---------------------
1999 $ 332,524
2000 870,346
2001 178,963
2002 38,036
----------
$1,419,869
==========
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. See Note 19 as to the subsequent
satisfaction of these loans as of March 31, 1998 through the grant of options to
purchase common stock.
NOTE 10 - SUPPLEMENTAL DISCLOSURE OF LOSS PER SHARE
<TABLE>
<S> <C> <C> <C>
BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE:
Before Extraordinary Income (4.56) (0.14) (1.12)
------- ------- ------
Extraordinary Income .23 -- (.01)
=== === ====
Loss per Common Share $(4.33) $(0.14) $(1.13)
------ ------ -----
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,422,633 12,189,174 5,337,876
========= ========== =========
</TABLE>
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC. (FORMERLY ELECTRONICS COMMUNICATIONS CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - CONVERTIBLE PREFERRED STOCK
On July 23, 1996, the Board of Directors of the Company authorized the issuance
of an aggregate of 4,000,000 shares of Series B Preferred Stock ("Preferred
Stock"). Each share of Preferred Stock was convertible into .13 shares of the
Company's common stock. These shares were purchased by certain officers and
directors of the Company for three year Promissory Notes ("Notes") bearing
interest at the rate of 7% per annum. The interest was to be accrued and was not
to be payable until the securities were sold. The notes were non-recourse, but
collateralized by the pledge of the Preferred Stock. Each share of Preferred
Stock was subject to a three year vesting period, whereby 1/3 was immediately
vested, and the balance was to be vested during the next two years as long as
the aforementioned individuals remained as either officers or directors of the
Company.
In an effort to hire a new management team and secure anticipated further
financing, said officers and directors agreed to rescind this transaction. As a
result, the 4,000,000 shares of Series B Preferred have been rescinded by the
Company and are no longer deemed outstanding.
On December 24, 1997, the new Board of Directors of the Company authorized the
issuance of a minimum of 20 shares and a maximum of 45 shares of Series C
Preferred Stock ("Preferred Stock") at the aggregate subscription price of
$100,000 per share pursuant to an offer and sale of such Preferred Stock in a
Regulation S Private Placement Offering. Holders of the Preferred Stock are
entitled to receive a 10% cumulative annual dividend payable semi-annually in
cash, or at the Company's option, in shares of the Company's common stock $.60
par value. The Preferred Stock is non-voting and is convertible in whole or in
part at any time commencing fifty (50) days after issuance at the election of
the holder, into shares of common stock at an initial conversion price equal to
a 25% discount from the average closing bid price for the common stock in the
over-the-counter market for the five trading days immediately preceding the
conversion, said discount thereafter increasing at the rate of 2% per calendar
month commencing March 1, 1998 up to a maximum discount of 35% ("the Conversion
Formula"). The Company has no ability to force conversion but 24 months after
issuance of the initial Preferred Stock, any outstanding Preferred Stock will
automatically convert into shares of Common Stock based on the Conversion
Formula then in effect. The Company paid a placement fee equal to 13% of the
gross proceeds to the Placement Agent. As of December 31, 1997, the Company
issued 30 shares of Preferred Stock and received $2,595,000, net of $405,000 in
expenses. In accordance with EITF bulletin D-60, the Company has recorded an
adjustment for the discount on Common Stock available to Preferred shareholders
and a corresponding increase to additional paid in capital of $1,615,000,
representing the value of the 35% conversion discount offered on the Preferred
Stock. This cost is being amortized over the period in which the maximum
discount will be realized, commencing with the date of the issuance.
On January 20, 1998, the Company completed its December 1997 Regulation S
Private Offering through the sale of an additional 15 shares of its 1997 Series
C Convertible Preferred Stock and received $1,302,500 net of $197,500 in
expenses. In accordance with EITF bulletin D-60, the Company has recorded an
adjustment for the discount on Common Stock available to Preferred shareholders
and a corresponding increase to additional paid in capital of $808,000,
representing the value of the 35% conversion discount offered on the Preferred
Stock. This cost is being amortized over the period in which the maximum
discount will be realized, commencing with the date of the issuance.
As of March 31, 1998, there were dividends in arrears of $112,500 on the 45
shares outstanding of the Series C Convertible Preferred Stock.
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC. (FORMERLY ELECTRONICS COMMUNICATIONS CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - INCOME TAXES
The Company adopted the liability method of accounting for income taxes, as set
forth in Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes." Under the liability method, deferred taxes are determined based
on the differences between the financial statement and tax basis of assets and
liabilities at enacted tax rates in effect in the years in which the differences
are expected to reverse. At December 31, 1997, the Company had federal net
operating loss carryforwards of approximately $11,000,000, which will expire
beginning in fiscal 2010. These losses are limited by the provisions of Section
382 of the Internal Revenue Code due to a considered more than 50% change in
ownership with the issuance of the Convertible Subordinated Debentures in August
1997. Following such a change, the utilization of tax loss carryforwards is
limited to the value of the Company on the date of such change, multiplied by
the Federal long-term exempt rate (the "annual limitation"). To the extent
amounts available under the annual limitation are not used, they may be carried
forward for the remainder of 15 years from the date the losses were originally
incurred. As a result of the change in ownership, use of net operating losses
will be limited to approximately $300,000 per year subject to certain additional
limitations.
The Company has deferred tax asset of approximately $1,500,000 at December 31,
1997, representing principally the tax benefit of the loss carry forwards under
Section 382 and for periods subsequent to the effective date of the Plan. This
deferred tax asset has been offset by a 100% valuation allowance. A valuation
allowance is provided when it is more likely than not that some portion of the
deferred tax assset will not be realized. Based on the Company's operating
results to date a full valuation allowance has been recorded at December 31,
1997.
NOTE 13- EXTRAORDINARY ITEM
During the year ended March 31, 1998, the Company recognized extraordinary
income of $556,787 resulting from the negotiated payment of certain trade
payables.
NOTE 14 - STOCK OPTIONS AND WARRANTS
STOCK OPTIONS
The Company has a Stock Option Plan, adopted in September 1994, and subsequently
approved by shareholders (the "1994 Plan") permitting the granting of stock
options exercisable to purchase an aggregate 25,000 shares of Common Stock to
employees, directors and consultants. No options are outstanding under the 1994
Plan as of March 31, 1998.
Pursuant to the unanimous written consent of the Board of Directors on September
29, 1997, options exercisable to purchase the following number of shares of
Common Stock at $1.30 per share were granted to the following officers and
directors:
William S. Taylor 176,923 shares
Les Winder 103,846 shares
Brenda Taylor 50,000 shares
Robert DePalo 192,308 shares
All of such options were exercised. Pursuant to certain Settlement Agreements
with prior management, the Company issued to each of such individuals IRS Form
W-2 indicating in addition to any other compensation paid to each by the Company
in 1997, additional compensation in an amount equal to the difference between
the number of shares issued to the individual multiplied by $1.65626 (the mean
between the per share closing bid and asked prices for the Common Stock on
October 8, 1997) and certain credits including amounts due on the Company's
books. Additional options granted to William S. Taylor, Les Winder, Brenda
Taylor and Robert DePalo on September 29, 1997, exercisable to purchase an
aggregate 290,000 shares at $2.00 per share and an aggregate 270,000 shares at
$4.00 per share were cancelled prior to issuance. Mr. DePalo was also granted
options on September 29, 1997 exercisable to purchase 90,000 shares at $2.00 per
share which options were subsequently reduced to permit the purchase of 80,000
shares at $2.00. These options remain outstanding.
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC. (FORMERLY ELECTRONICS COMMUNICATIONS CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - STOCK OPTIONS AND WARRANTS - (CONTINUED)
On October 30, 1997, the Board of Directors of the Company (the "Board"),
subject to shareholder approval, adopted the October 30, 1997 Stock Option Plan
(the "1997 Plan"). The aggregate number and class of shares which may be the
subject of options granted pursuant to the 1997 Plan is 1,000,000 shares of
Common Stock, $.60 par value, of the Company. The options to be granted may, at
the discretion of the Company, be designated to be options which will qualify
for incentive stock option treatment ("ISO's) under the Internal Revenue Code of
1986, as amended (the "Code") or options which will not so qualify
("Non-ISO's"). Officers, directors and key employees of the Company or
subsidiaries of the Company, as determined by the Board, shall be eligible to
receive options under the 1997 Plan. The exercise price for the Shares
purchasable under ISOs granted pursuant to the 1997 Plan shall not be less than
100%, or, in the case of an ISO granted to a Ten Percent Shareholder, 110%, of
the fair market value per share of the Shares subject to the ISO under the plan
at the Date of Grant, as determined by the Board. Under the 1997 Plan, the Board
shall have absolute discretion in determining the period during which, the rate
at which, and the terms and conditions upon which any option granted may be
exercised, and whether any option exercisable in installments is to be
exercisable for the period exceeding ten (10) years or, in the case of an option
granted to a Ten Percent Shareholder, five (5) years from the Date of Grant.
Except as set forth in the 1997 Plan, ISOs shall terminate upon the date of
voluntary or involuntary termination of employment regardless of the expiration
date specified in such ISO. No option granted under the Plan may be sold,
pledged, assigned or transferred in any manner except to the extent that options
may be exercised by an executor or administrator upon the death of the holder.
The 1997 Plan and any options granted pursuant to the 1997 Plan received
approval of the shareholders at the special meeting in lieu of an annual meeting
held on May 28, 1998.
NON-QUALIFIED OPTIONS ISSUED PURSUANT TO THE 1997 PLAN AND OUTSTANDING AT
MARCH 31, 1998 ARE AS FOLLOWS:
Shares Exercise Price Expiration
ISSUABLE PER SHARE DATE
Non-qualified Options Issued to
President and CEO in October 1997 300,000 (a) 9/2007
Non-qualified Options Issued to 145,000 (b) (b)
Directors in October 1997
Non-qualified Options issued to 230,000 $2.25 9/2002
-------
Former Director and employee
Total 675,000
=======
(a) The exercise prices for the 300,000 shares granted to the President and CEO
on 10/30/97 are as follows: 100,000 with an exercise price of the mean between
closing bid and closing asked prices on 10/30/97; 100,000 at $1.75 per share;
100,000 at $2.00 per share. The term of all options is ten years.
(b) The exercise prices and the terms for the 145,000 options are as follows:
(i) five-year non-qualified options to purchase 100,000 shares at the closing
mean price for the common stock on 10/30/97; 1/3 immediately exercisable, 1/3
commencing 11/1/98 and 1/3 commencing 11/1/99; and (ii) five-year non-qualified
options, exercisable to purchase 45,000 shares at the closing mean price for the
common stock on 10/30/97.
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC. (FORMERLY ELECTRONICS COMMUNICATIONS CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUALIFIED OPTIONS ISSUED PURSUANT TO THE 1997 PLAN AND OUTSTANDING AT MARCH 31,
1998 ARE AS FOLLOWS:
Shares Exercise Price Expiration
Issuable Per Share Date
-------- --------- ----
Options issued to President 200,000 $1.453125 (c)
& CEO in October 1997
Options issued to Secretary, 100,000 $2.109375 12/2002
Executive VP and CFO
Options issued to Vice
President of Operations 50,000 (d) 1/2003
--------
Total 350,000
========
(c) The exercise prices for the 200,000 shares issued to the President & CEO in
October 1997 are as follows: (i) 68,817 shares purchasable upon exercise of
incentive stock options at an exercise price of $1.453125; (ii) 131,183 shares
purchasable upon exercise of incentive stock options at an exercise price of
$1.453125 per share, which options are first exercisable in 1999 (68,817 shares)
and in 2000 (62,366 shares).
(d) The exercise price equals the mean between the closing bid and the closing
asked prices for the Company's common stock in the over-the-counter market on
February 19,1998.
Management intends to present for Board approval in July 1998 the issuance of
100,000 additional shares to certain key employees. The exercise price will be
the mean between the closing bid and the closing asked prices for the Company's
common stock in the over-the-counter market on the date approved by the Board.
Options Outstanding are summarized as follows:
<TABLE>
<CAPTION>
Year Ended Three Months Ended Year Ended
March 31, 1998 March 31, 1997 December 31, 1996
-------------- -------------- -----------------
<S> <C> <C> <C>
Options outstanding at Beginning of Year 80,000 80,000 20,000
Options Granted 1,548,077 (a) -- 60,000
Options Expired -- -- --
Options Exercised 523,077 -- --
Options Transferred -- --
Options Cancelled (80,000) -- --
------- ------ ------
Options outstanding at End of Year
1,025,000 80,000 80,000
========= ====== ======
Exercise Price per Share $.62-$2.29 $1.80-$3.80 $1.80-$3.80
Fair Value of Options Granted $1.66 -- $26.20
</TABLE>
(a) 945,000 of the options granted during the year ended March 31, 1998 were
under the October 30, 1997 Incentive Stock Option Plan approved by the
shareholders on May 28, 1998 and 80,000 options were granted via Board of
Directors approval in September 1997. The remaining 603,077 options granted
during the year ended March 31, 1998 were pursuant to the unanimous written
consent of the Board of Directors on September 29, 1997.
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC. (FORMERLY ELECTRONICS COMMUNICATIONS CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At March 31, 1998, options to purchase 45,000 shares are available for grant
under the 1997 Plan.
Proforma results of operations, had FAS 123 been used to account for stock-based
compensation cost, would have resulted in additional compensation expense of
approximately $2,966,000, $-- and $393,000 for the year ended March 31, 1998,
the three months ended March 31, 1997 and the year ended December 31, 1996,
resulting in proforma net losses of approximately $13,446,000, $1,744,000 and
$6,424,000 for those same reporting periods.
The fair market value of the warrants were estimated at the date of grant using
a Black-Scholes option pricing model with the following weighted-average
assumptions, respective: risk-free interest rates of 14%, dividend yield of
0.0%, volatility factors of the expected market price of the Company's Common
Stock of 203% and an expected life equaling the warrants exercise periods.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vested restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility.
Because the Company's warrants have characteristics significantly
different from those of normal publicly traded stock, and because changes in the
subjective input assumptions can materially affect the fair value estimate. In
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock warrants.
WARRANTS
On November 20, 1994, the Company's Board of Directors authorized the sale of
Class B Warrants exercisable to purchase an aggregate of 82,500 shares of Common
Stock to William S. Taylor (39,167 shares), Les Winder (8,333 shares), Brenda
Taylor (16,667 shares), Stewart Taylor, who is the husband of Brenda Taylor and
father of William S. Taylor (16,667 shares) and to Fawn Taylor-McCauley, sister
of William S. Taylor and daughter of Brenda and Stewart Taylor (1,667) for an
aggregate of $99,000 in principal amount of 8% promissory notes of $1.20 per
warrant. The Class B Warrants were initially exercisable at $60 per share during
the four year period ending May 12, 1999. On January 20, 1995, the Company
reduced the exercise price to $30 per share for Class B Warrants exercisable to
purchase an aggregate 25,000 shares owned by W.S. Taylor (12,500), Brenda Taylor
(6,250shares) and Stewart Taylor (6,250 shares) and in exchange, received
certain financial guarantees and the extension of the due date of certain loans
owed by the Company to William S. Taylor and Stewart Taylor. On November 20,
1995, the Board of Directors authorized the conversion of the remaining Class B
Warrants exercisable to purchase 57,500 shares of Common Stock at an exercise
price of $60 per share (reduced to $27 per share on December 24, 1996 and
further reduced to $2.25 per share effective September 16, 1997). Of the $99,000
purchase price of the Class B Warrants, an aggregate $93,299 had been paid at
December 31, 1996. The Company subsequently wrote off the $5,701 balance. On
November 16, 1995, William S. Taylor, Brenda Taylor, Stewart Taylor and Les
Winder each sold Class B Warrants exercisable to purchase 6,937.5 shares (or an
aggregate 27,750 shares of Common Stock) to five individuals at the $1.20 per
warrant purchase price. A portion of these Class B Warrants, exercisable to
purchase an aggregate 11,083 shares of Common Stock were sold. In connection
with settlement agreements signed by them (as discussed in Note 19) with the
Company in the fourth quarter of fiscal year 1998, William S. Taylor, Brenda
Taylor and Les Winder each represented that he (or she) no longer owned any
Class A Warrants or Class B Warrants.
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
Class A Warrants, exercisable to purchase an aggregate 191,667 shares of Common
Stock, at an exercise price of $60 per share (reduced to $27 per share on
December 24, 1996 and further reduced to $2.25 per share effective September 16,
1997), as compensation for certain loans and guarantees made by Brenda Taylor
and Messrs. William S. Taylor, Winder and DePablo. The Company reserved 191,667
shares of
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC. (FORMERLY ELECTRONICS COMMUNICATIONS CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Common Stock for issuance upon the exercise of such Class A Warrants. This
authorization was part of an overall plan to compensate such person for
providing personal guarantees and for posting certain 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. These compensation arrangements
included the right to purchase up to six (6) shares of the capital stock of the
Company's PCN subsidiary for $1,000 per share by each Messrs. Taylor, Winder and
DePalo and Mrs. Taylor, for an aggregate of 24% of the stock of PCN. Two of the
six (6) shares allocated to Mr. DePalo were purchased by his wife. The grant of
the Class A Warrants and the purchase and delivery of the PCN stock was
conditioned on the grant to the Company of the PCS licenses and the delivery and
acceptance of the Company's FCC Notes and related Security Agreements by the
FCC. Pursuant to certain Settlement Agreements more particularly defined in the
Company's proxy statement, Brenda Taylor and Messrs. William S. Taylor, Winder
and DePalo waived any rights to these Class A Warrants and rescinded their
purchase of PCN stock.
As of March 31, 1998, there are five-year warrants outstanding exercisable to
purchase 500,000 shares of Common Stock that were issued in connection with a
lending transaction as discussed more fully in Note 5(B)(5).
NOTE 15 - 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 in Fairfield
New Jersey. The Company had an option to renew the lease for a 5 year period at
an adjusted annual rent.
In October 1997, the Company entered into an agreement of termination of this
lease with its landlord. The Company agreed to pay the landlord the sum of
$11,000 and release the security deposit of $18,500 to the landlord. The lease
between the parties was surrendered and cancelled as of midnight on December 31,
1997. The rent for November and December was reduced to $6,000 per month.
On December 8, 1997 the Company entered into a five year operating lease
expiring December 31, 2002 for 1,500 square feet of office space in Melville,
Long Island, New York. Minimum future rental payments under this operating
lease, including electric is $35,735 per annum.
Rent expense was approximately $213,000 for the year ended March 31, 1998,
$37,000 for the three months ended March 31, 1997 and $232,000 for the year
ended December 31, 1996.
NOTE 16 - BUSINESS PLAN AND LIQUIDITY
In conjunction with the relocation of the Company's corporate headquarters and
paging operations from Fairfield, New Jersey to New York and an exit from the
two-way radio business in the fiscal 1998 fourth quarter, the Company reduced
its fixed assets in the amount of approximately $390,000. Management has also
made the decision to discontinue reselling paging airtime for Skytel and other
paging carriers and focus its sales efforts on adding direct subscribers to the
Company's 900 MHz Glenayre paging system. In connection with this decision,
Management has entered into a settlement agreement effective July 1, 1998 with
Skytel. Pursuant to the terms of the settlement agreement, the Company will pay
Skytel $30,000 on or prior to July 31, 1998 and tender its Skytel customer base
to Skytel, who will assume all future billing, collections and customer service.
Skytel will apply 25% of all future cash collections from the transferred
customer base against the remaining balance due to Skytel after payments made
under the Settlement Agreement. Once the balance due Skytel has reached $75,000,
Skytel will release the Company from any further obligations under the
Settlement Agreement. Similar agreements are currently being negotiated with
other carriers where the Company is acting as a reseller of airtime.
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC. (FORMERLY ELECTRONICS COMMUNICATIONS CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - BUSINESS PLAN AND LIQUIDITY - (CONTINUED)
On March 16, 1998, Threshold Communications, Inc. ("TCI"), the Company's wholly
owned paging subsidiary, entered into a Management Service Agreement with Paging
Source of New York ("PSNY"). Under this Agreement, PSNY was to, among other
things, perform billing, customer service and other management services for a
monthly fee. As a result of PSNY's subsequent breach of this Agreement, TCI has
internalized the management of paging operations. In response to this, TCI
purchased new billing software, hired a general manager, director of sales and
several customer service representatives and billing personnel. TCI intends to
sell airtime through resellers and direct sales channels.
Personal Communications Network, Inc. ("PCN"), a wholly owned subsidiary of the
Company, is currently seeking to raise funds, which may include the issuance of
equity securities, necessary to build out a wireless communications network,
thus utilizing the Company's six PCS licenses in Vermont, Maine and a portion of
upstate New York, with certain overlap in Pennsylvania and New Hampshire. There
can be no assurance that the Company will be able to secure financing sufficient
to cover the cost associated with the system build out, its operations and the
FCC licenses.
See Note 20(B) for further discussion of debt reduction resulting from the
Company's election of the Disaggregation Option. Based on management's
continuing negotiations for vendor and other third party financing, election of
the Disaggregation Option as discussed in Note 20(B) will enhance PCN's ability
to secure such financing.
The Company's financial statements for the year ended March 31, 1998 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 continued to incur net losses with a net loss of $10,480,393 for
the year ended March 31, 1998. The Company has a working capital deficiency of
$752,259 at March 31,1998 and its cash used by operations during fiscal year
ended March 31, 1998 was $4,235,680. If cash flows from operations were assumed
to be the same for the fiscal year 1999 as 1998, the Company would continue to
have a working capital deficiency. Recognizing that the Company must generate
additional resources or consider modifying operations to enable it to continue
operations with available resources, management has retained a public relations
firm and certain other independent consultants to assist it in taking steps to
minimize this cash shortfall and to assist it in identifying entities interested
in its business. However, no assurances can be given that the efforts of the
Company or that of its consultants will be successful in raising additional
capital. Furthermore, there can be no assurance, assuming the Company raises
additional funds, that the Company will achieve profitability or positive cash
flow. If the Company is unable to obtain adequate additional financing, the
Company may be required to seek bankruptcy protection from its creditors.
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC. (FORMERLY ELECTRONICS COMMUNICATIONS CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17- CONTINGENT LIABILITIES
(A) On October 31, 1997, the Company (by order of the Board of Directors)
entered into an employment agreement with the new president. The term of the
agreement is for forty months beginning on November 1, 1997. The agreement
provides for compensation of $125,000 for the period from November 1, 1997 to
October 31, 1998 with $25,000 increases in each of the next two annual periods.
Compensation for the period from November 1, 2000 to March 31, 2001 will be
approximately $73,000 (five months at an annual rate of $175,000).
(B) On December 24, 1997, the Company (by order of the Board of Directors)
entered into an employment agreement with the new treasurer and chief financial
officer. The term of the agreement is for one year commencing January 1, 1998
with compensation of $85,000 per annum.
NOTE 18 - PENDING LITIGATION
On or about October 15, 1997, the Company was served with a Summons in an action
entitled: Motorola, Inc., Plaintiff, v. Electronics Communications Corp.,
Defendant, in the Superior Court of New Jersey Law Division: Union County
Special Civil Part. Motorola claims the Company owes it approximately $106,000
including interest for merchandise, consisting of various pager parts and
equipment, restocking fees of approximately $13,100, and attorneys' fees. New
management and counsel, after a review of the matter, believe that Motorola is
inaccurate in its claim and has made several attempts, which were unsuccessful,
to settle this matter. On or about May 15, 1998, Motorola filed a Motion for
Summary Judgement with the Superior Court of New Jersey Law Division, Essex
County. On June 19, 1998, Motorola's motion for summary judgement was denied.
Despite the Company's lack of success in the past in settling this matter,
management, in an effort to avoid litigation and minimize attorneys' fees, will
continue its efforts to resolve this dispute on terms management believes to be
favorable for the Company. There can be no assurances that the Company will be
successful in settling this dispute and avoiding litigation.
NOTE 19 - RELATED PARTY TRANSACTIONS
In January 1998, the Company entered into settlement agreements with three
former officer/directors, William S. Taylor, his mother Brenda Taylor and Les
Winder. Pursuant to the agreements, each of the three individuals agreed to
cancel his or her employment agreement and proposed consulting agreement with
the Company, any rights to warrants exercisable to purchase shares of the
Company's common stock and any rights to shares of the Company's Series B
Preferred Stock. Each individual also agreed to rescind the transaction by which
he or she had purchased 6% of the stock of the Company's PCN subsidiary for
$6,000. In consideration thereof, the Company agreed, unless required to do so
by court order, to take no action to challenge the issuance to each individual
of shares of its common stock (176,923 shares to William S. Taylor, 50,000
shares to Brenda Taylor and 103,846 shares to Les Winder) pursuant to options
granted to such individual by the September 29, 1997 unanimous written consent
of the Company's board of directors. The Company issued W-2s to each of such
individuals and to the IRS for 1997 indicating in addition to any other
compensation paid to the individual by the Company in 1997, additional
compensation in an amount equal to the difference between the value of the
shares issued based upon the mean between the closing bid and asked prices for
the Company's common stock in the over-the-counter market on October 8, 1997 on
the one
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC. (FORMERLY ELECTRONICS COMMUNICATIONS CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 -RELATED PARTY TRANSACTIONS - (CONTINUED)
hand, and the net amount of the loans and advances owed by the Company to the
individual (or in Mr. Winder's case, by Mr. Winder to the Company) as indicated
by the Company's books of account, plus the $6,000 credit for rescission of the
PCN stock purchase plus legal fees paid by the individual on behalf of the
Company, or the other. The Company's books of account reflected net amounts owed
by the Company to William S. Taylor and Brenda Taylor of $109,671 and
approximately $65,000 respectively, and by Les Winder to the Company of $11,806.
William S. Taylor and Brenda Taylor have advised the Company that it is their
position that certain General Releases, Indemnity and Hold Harmless Provisions
adopted by the directors on September 29, 1997 when William S. Taylor, Brenda
Taylor and Les Winder constituted three of the six members of the board of
directors, indemnifying them from any claims asserted in connection with any
action taken for or their role with the Company are in full force. It is present
management's position that such releases and hold harmless provisions are not in
effect.
On February 5, 1997, the Company entered into agreements with a director, Robert
DePalo, and his wife which resulted in the rescission by Mr. DePalo of his
previous purchase for $4,000 of 4% of the stock of the PCN subsidiary and the
purchase by the Company from Ms. DePalo for $67,000 of 2% of the stock of the
PCN subsidiary which she had purchased for $2,000 in August 1996. As a result of
the agreements with William S. Taylor, Mr. Winder and Mr. and Mrs. DePalo, PCN
is now 100% owned by the Company.
Robert DePalo pursuant to his February 5, 1996 agreement with the Company,
agreed to cancel his prior employment agreement and a prior proposed consulting
agreement with the Company, any rights to warrants exercisable to purchase
shares of the Company's common stock and any rights to shares of the Company's
Series B Preferred Stock. He also agreed to waive any and all options he held
exercisable to purchase shares of the Company's common stock excluding (a)
options granted to him pursuant to the September 29, 1997 unanimous written
consent of the directors and exercised by him to purchase 192,308 shares of the
corporation's common stock, (b) five-year options previously granted to him and
exercisable to purchase 80,000 shares of the Company's common stock at $2.00 per
share, and (c) five-year options to purchase 150,000 shares of the Company's
common stock at $2.25 per share pursuant to a consulting agreement with the
Company executed on February 6, 1998 and hereinafter described.
Pursuant to the agreement with Mr. DePalo, the Company issued a W-2 to him and
to the IRS for 1997 indicating in addition to any other compensation paid to him
by the Company in 1997, additional compensation in an amount equal to the
difference between the value of the 192,308 shares issued to him based upon the
mean between the closing bid and asked prices for the Company's common stock in
the over-the-counter market on October 8, 1997 on the one hand, and the net
amount of the loans and advances owed by the Company to Mr. DePalo as indicated
by the Company's books of account, plus a $4,000 credit for rescission of his
purchase of the PCN stock plus legal fees paid by Mr. DePalo on behalf of the
Company. The Company's books of account reflected net amounts owed by the
Company to Mr. DePalo of $198,746.
In consideration for Mr. DePalo's agreements and waivers, the Company and Mr.
DePalo executed a two-year consulting agreement pursuant to which Mr. DePalo was
retained as a consultant at an annual salary of $75,000 and was granted
five-year options pursuant to the Company's October 30, 1997 Stock Option Plan,
exercisable to purchase 150,000 shares of the Company's common stock at $2.25
per share.
<PAGE>
NORTHEAST DIGITAL NETWORKS, INC. (FORMERLY ELECTRONICS COMMUNICATIONS CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - SUBSEQUENT EVENTS
(A) As of July 8, 1998, $562,500 of the Company's 8% convertible debentures had
been converted into 1,298,684 shares of the Company's Common Stock and 14.5
shares of the 1997 Series C Convertible Preferred Stock had been converted into
3,462,463 shares of the Company's Common Stock.
(B) On October 16, 1997 in an effort to bring relief to C-Block license holders,
the FCC offered three options. The three options are as follows: (1) an "Amnesty
Option" permitting return of the licenses which will result in the forfeiture of
the original down payment of $2,645,220 and the return to the Company of the
previous installments paid which amount to approximately $286,000; (2) a
"Disaggregation Option" permitting the return of 15 megahertz of the 30
megahertz of spectrum awarded under the licenses, back to the FCC and reducing
the current note payable to the FCC by 50%; and (3) a "Prepayment Option"
permitting the exchange of all licenses in a particular BTA for a partial
reduction of the current note payable to the FCC (equal to 70% of the total down
payments of the surrendered licenses).
On June 8, 1998, the Company elected the Disaggregation Option. As a result, 15
MHz of the 30 MHz of spectrum awarded under the licenses were returned to the
FCC. Accrued interest due to the FCC of $2,233,418 was reduced by $1,810,300 to
$423,118 after applying a credit for 40% of the downpayment forfeiture of
$529,044 and a credit for 50% of the interest payments made of $164,547. Total
accrued interest due to the FCC of $423,118 is to be paid in eight quarterly
installments of $45,890. Quarterly interest payments due on the FCC notes were
reduced from $416,622 to $208,311. The first payments due the FCC for interest
on the notes is currently $261,200 and is due on July 31, 1998. Debt incurred
for the licenses was reduced from $23,806,980 to $11,903,490 ($8,342,780 when
discounted using an imputed interest rate of 14% - see Note 1(H)).
After applying the effects of the Disaggregation election, the Company's March
31, 1998 Balance Sheet (summarized by major caption) would be:
ASSETS:
Current Assets $1,851,218
Net Property and Equipment 1,036,390
Other Assets 13,971,551
-----------
Total Assets $16,859,159
===========
LIABILITITES AND STOCKHOLDER'S EQUITY:
Current Liabilities $2,603,477
Long Term Liabilities 9,694,572
-----------
Total Liabilities 12,298,049
Stockholder's Equity 4,561,110
-----------
Total Liabilities and Stockholder's Equity $16,859,159
===========
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
See the Company's current report on Form 8-K for August 11, 1997 which indicated
the dismissal on said date of the Company's then principal independent
accountants, Stetz and Belgiovine CPA and the engagement of Wiss and Company,
LLP, CPAs as the Company's principal independent accountants. During the
Company's two most recently completed fiscal years and any intervening or
subsequent interim period, there were no disagreements between the Company and
either of the Company's two principal accounting firms on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure which disagreement(s), if not resolved to the satisfaction of
the accountants, would have caused it to make reference to the subject matter of
the disagreement(s) in connection with its report.
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table sets forth certain information with respect to each of
the directors and executive officers of the Company:
Nominee Director Position with
Age Since Company
--- ----- -------
Joseph A. Rosio 35 1997 Chairman of the Board,
President,
Chief Executive
Officer and Director
Christopher J. Garcia(a) 30 1998 Treasurer, Chief
Financial Officer,
Secretary and Director
John P. Cassella(a) 39 1997 Director
Mal Gurian(a) 71 1995 Director
(a) Member of the
Audit Committee.
The Audit Committee, established in February 1998, confers with the
Company's auditors and reviews, evaluates and advises the Board of Directors
concerning the adequacy of the Company's accounting systems, its financial
reporting practices, the maintenance of its books and records and its internal
controls. In addition, the Audit Committee reviews the scope of the audit of the
Company's financial statements and the results thereof.
The Company does not have an Executive Committee. The term of office of
each director expires at the next annual meeting of stockholders and when his
successor is elected and qualified. The term of office of each executive officer
expires at the next organizational meeting of the board of directors following
the next annual meeting of stockholders and when his successor is elected and
qualified.
<PAGE>
The following is a brief account of the business experience of each
executive officer and director of the Company.
Joseph A. Rosio is a graduate of Pace University with a Bachelor of Science
degree in accounting (1986). He became duly licensed by New York State as a
certified public accountant in December 1989. From 1986 through 1988, Mr. Rosio
was employed as an assistant accountant and then as a senior accountant by
Arthur Andersen & Co. in New York City. From June 1988 through 1990, he was a
financial reporting analyst and then a senior analyst at Reliance Group Holdings
Inc., a holding company with interests in property, casualty, life and title
insurance companies, and other diversified investments. From July 1990 through
1992, Mr. Rosio was a senior accountant in the Emerging Business Group of Ernst
& Young in New York City. From July 1992 through 1996, Mr. Rosio was initially,
assistant to the chief financial officer of Troster Singer, a division of the
securities trading firm of Spear Leeds & Kellogg and subsequently became a
trader, conducting market making activities for Troster Singer. From August 1996
through August 1997, Mr. Rosio was a senior trader conducting market making
activities for the securities trading firm of Knight Securities LP in Jersey
City, New Jersey. Mr. Rosio subsequently rendered general business consulting
services until he became the president and chief executive officer of the
Company in October 1997.
Christopher J. Garcia is a graduate of St. John's University with a
Bachelor of Science degree in accounting (1989) and of Boston College Law School
with a J.D. degree (1996). He became duly licensed by New York State as a
certified public accountant in November 1991 and was admitted to the Connecticut
Bar in 1996. Mr. Garcia was employed as a senior accountant at Ernst & Young in
New York City from 1989 through 1992 and through 1993 as an auditor by Time
Warner. In 1996 and 1997, he was an associate at the Hartford, Connecticut law
firm of Murtha, Cullina, Richter and Pinney. Mr. Garcia became the treasurer,
chief financial officer, secretary and a director of the Company in early 1998.
From 1982 through the present, John P. Cassella has been employed by the
Nortel Division of Northern Telecom Corporation, a manufacturer and provider of
telecommunications products and services and since May 1997, by the successor in
interest to the Nortel Division's business, Wiltel Communications, LLC. From
1982 through 1992, Mr. Cassella was a technician, then a supervisor and finally
the Branch Manager of the New York City office of the Nortel Division. In 1992,
Mr. Cassella became the customer support center director and in 1994 the
National Service Director for the Nortel Division, employed at its Rocky Hill,
Connecticut headquarters. In May 1997, Wiltel Communications, LLC succeeded to
the business of the Nortel Division and Mr. Cassella now serves at such Rocky
Hill, Connecticut location as National Service Director for Wiltel. Mr. Cassella
was elected as a director of the Company in October 1997. He is not actively
engaged in the business of the Company.
From January 1995 to the present, Mal Gurian has been Chairman of the Board
of Authentix Network, Inc., provider of subscriber authentication for cellular
telephone carriers, with principal offices in Tucson, Arizona. Mr. Gurian began
his career as the Vice President of Radio Telephone Corporation in 1960. He then
became Senior Vice President of Aerotron Inc., a Siemens 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, that company's Cellular Telephone Division. While
President and a member of the Board of Directors of OKI Telecom's Cellular
Telephone Division, the world's first manufacturer of a cellular telephone, Mal
Gurian was responsible for OKI receiving the first FCC type certification for a
cellular telephone. Following their divestiture by AT&T, Mr. Gurian was
instrumental in negotiating for OKI, private label contracts with the seven
Regional Bell Operating Companies. Under Mr. Gurian's leadership, OKI Telecom
quickly became one of the two major manufacturers of cellular phones for 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 in 1987, Mr. Gurian served as
President of Cartell, Inc. in Detroit and Cellcom Cellular Corporation in New
Jersey until late 1991. Mr.
<PAGE>
Gurian served as Chief Executive Officer and a Director of Universal Cellular
Corporation in early 1992. Mr. Gurian has developed strong relationships with
most of the 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 served as an Arbitrator for the American Arbitration Association. Mr.
Gurian 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), Washington, D.C.
(now known as "PCIA") and has served as a Director of that organization. He is
currently a Fellow and President Emeritus of the Radio Club of America and has
served that organization as 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
a 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. Gurian was elected as a
director of the Company in March 1995. He is not actively engaged in the
business of the Company.
COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT
Based solely upon a review of Forms 3 and 4 and on representations
made, the Company believes that with respect to the twelve-month period ended
March 31, 1998, all Section 16(a) filing requirements applicable to its
officers, directors and beneficial owners of more than 10% of its equity
securities were timely complied with except that Joseph A. Rosio and John P.
Cassella, who were elected directors on October 8, 1997, filed their Form 3s on
November 10, 1997.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
or accrued by the Company during the three calendar years ended December 31,
1996 to its executive officers.
SUMMARY COMPENSATION TABLE
(1994-1996)
Annual Compensation Long-term
<TABLE>
<CAPTION>
Compensation
Awards Payouts
Restricted
Name and Other Annual Stock Options/ LTIP All other
Principal Position Year Salary Bonus Compensation Award(s) Sars Payouts Compensation
- ------------------ ------ ------ ----- ------------ -------- ---- ------- ------------
(1) (2) (3) ($) ($) ($)
--- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William S. Taylor* 1996 $150,000 -- $4,065 -- -- -- (4)(5)(6)
President, CEO and 1995 $166,641 $67,500 $6,132 -- -- -- (5)
Chairman of the Board(7) 1994 $ 83,212 $50,000 $3,800 -- -- -- (5)
Les Winder 1996 $137,500 -- $2,225 -- -- -- (4)(5)(6)
Executive Vice President 1995 $117,245 $42,500 $2,778 -- -- -- (5)
and Treasurer, Director(8) 1994 $ 70,786 $50,000 $2,275 -- -- -- (5)
Brenda Taylor* 1996 $ 75,000 -- $1,557 -- -- -- (4)(5)(6)
Secretary and 1995 $ 38,278 -- $ 779 -- -- -- (5)
Director 1994 $ 36,173 -- $-0- -- -- -- (5)
Robert DePalo 1996 $ 75,000 -- $-0- -- -- -- (4)(5)(6)
Director, Finance 1995 $-0- -- $-0- -- -- -- (5)
1994 $-0- -- $-0- -- -- -- (5)
</TABLE>
- ---------
*William S. Taylor is Brenda Taylor's son.
(1) On 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 agreed to defer such increases, subject to accrual, until an
improvement in the Company's cash flow. All rights to these increases have been
waived. See "Item 12 - Settlements with Prior Management."
(2) The payment of bonuses to Messrs. Taylor and Winder for 1994 and 1995
was deferred until an improvement in the Company's cash flow. No payments on
account of these bonuses were made. All rights to these bonuses have been
waived. See "Item 12 - Settlements with Prior Management."
(3) Messrs. Taylor and Winder and Mrs. Taylor were also entitled to certain
fringe benefits in connection with their employment including an automobile
allowance and medical insurance benefits. The amount listed in this column
reflects the aggregate value of such fringe benefits for the applicable period.
(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 Class A Warrants, exercisable to purchase an aggregate 191,667 shares of
Common Stock, at an exercise price of $60 per share (reduced to $27 per share on
December 24, 1996 and further reduced to $2.25 per share effective September 16,
1997), as compensation for certain loans and guarantees made by Brenda Taylor
and Messrs. William S. Taylor, Winder and DePalo. The Company reserved 191,667
shares of Common Stock for issuance upon the exercise of such Class A Warrants.
This authorization was part of an overall plan to compensate such persons for
providing personal guarantees and for posting certain 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. These compensation arrangements
included the right to purchase up to six (6) shares of the capital stock of the
Company's PCN subsidiary 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. Two of
the six (6) shares allocated to Mr. DePalo were purchased by his wife. The grant
of the Class A Warrants and the purchase and delivery of the PCN stock was
conditioned on the grant to the Company of the PCS Licenses and the delivery and
acceptance of the Company's FCC Notes and related Security Agreements by the
FCC. See "Item 12 - Settlements with Prior Management" as to agreements pursuant
to which Brenda Taylor and Messrs. William S. Taylor, Winder and DePalo waived
any rights to these Class A Warrants and rescinded their purchases of PCN stock,
and pursuant to which, the Company repurchased Mrs. DePalo's shares of PCN
stock.
(5) On November 20, 1994, the Company's Board of Directors authorized the
sale of Class B Warrants exercisable to purchase an aggregate 82,500 shares of
Common Stock to William S. Taylor (39,167 shares), Les Winder (8,333 shares),
Brenda Taylor (16,667 shares), Stewart Taylor, who is the husband of Brenda
Taylor and father of William S. Taylor (16,667 shares) and to Fawn
Taylor-McCauley, sister of William S. Taylor and daughter of Brenda and Stewart
Taylor (1,666 shares) for an aggregate $99,000 in principal amount of 8%
promissory notes or $1.20 per warrant. The Class B Warrants were initially
exercisable at $60 per share during the four-year period ending May 12, 1999. On
January 20, 1995, the Company reduced the exercise price to $30 per share for
Class B Warrants exercisable to purchase an aggregate 25,000 shares owned by
William S. Taylor (12,500 shares), Brenda Taylor (6,250 shares) and Stewart
Taylor (6,250 shares) and in exchange, received certain financial guarantees and
the extension of the due date of certain loans owed by the Company to William S.
Taylor and Stewart Taylor. On November 20, 1995, the Board of Directors
authorized the conversion of the remaining Class B Warrants exercisable to
purchase 57,500 shares of Common Stock into a like number of Class A Warrants
exercisable to purchase 57,500 shares of Common Stock at an exercise price of
$60 per share (reduced to $27 per share on December 24, 1996 and further reduced
to $2.25 per share effective September 16, 1997). Of the $99,000 purchase price
for the Class B Warrants, an aggregate $93,299 had been paid at December 31,
1996. The Company subsequently wrote off the $5,701 balance. On November 16,
1995, William S. Taylor, Brenda Taylor, Stewart Taylor and Les Winder each sold
Class B Warrants exercisable to purchase 6,937.5 shares (or an aggregate 27,750
shares of Common Stock) to five individuals at the $1.20 per warrant purchase
price. A portion of these Class B Warrants, exercisable to purchase an aggregate
11,083 shares of Common Stock were purchased by Joseph Albanese, at the time, a
49% owner of the Company's TCI subsidiary. In connection with settlement
agreements signed by them with the Company in the first quarter of calendar year
1998, William S. Taylor, Brenda Taylor and Les Winder each represented that he
(or she) no longer owned any Class A Warrants or Class B Warrants. See "Item 12
- - Settlements with Prior Management."
(6) On July 23, 1996, the Company's Board of Directors authorized the sale
of an aggregate 4,000,000 shares of Series B Preferred Stock in equal amounts to
Brenda Taylor and Messrs. William S. Taylor, Winder and DePalo for $6,000,000 in
principal amount of 7% non-recourse promissory notes (the "7% Notes") to be
collateralized by a pledge of the Stock. The issuance of the Series B Preferred
Stock was approved by the Company's stockholders at the Annual Meeting of
Shareholders held on October 17, 1996. The Series B Preferred Stock was
convertible into an aggregate 500,000 shares of Common Stock. The Company did
not issue the Series B Preferred Stock and did not receive any 7% Notes in
payment therefor. Brenda Taylor and Messrs. William S. Taylor, Winder and DePalo
subsequently waived any rights to and rescinded their purchases of the Series B
Stock. See "Item 12 - Settlements with Prior Management."
(7) Effective December 1, 1994, the Company entered into an employment
agreement with William S. 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 provided for annual compensation of $150,000 during
the term of his employment and entitled Mr. Taylor to certain fringe benefits,
including an automobile and maintenance, disability insurance, medical benefits
and life insurance coverage. Mr. Taylor agreed that during the term of his
agreement and for twelve months thereafter (unless the agreement was terminated
without cause), he would be subject to non-competition provisions. Upon
termination of employment without cause, Mr. Taylor would be entitled to a lump
sum payment of $75,000 multiplied by the number of years of his employment by
the Company. See "Item 12 - Settlements with Prior Management" as to the
cancellation of this employment agreement and the waiver by Mr. Taylor of all
rights thereunder.
(8) On May 17, 1995, the Company entered into an employment agreement with
Les Winder, which agreement was also amended in October 1996. The term of the
agreement was for five years with an option for an additional three-year term,
renewable annually thereafter at the option of Mr. Winder. The agreement
provided for annual compensation of $137,500 during the term of his employment
and entitled Mr. Winder to certain fringe benefits, including an automobile
(leasing and insuring), disability insurance, medical benefits and life
insurance coverage. Mr. Winder agreed that during the term of his agreement and
for six months thereafter (unless the agreement was terminated without cause),
he would be subject to non-competition provisions. Upon termination of
employment without cause, Mr. Winder would be entitled to a lump sum payment of
$50,000 multiplied by the number of years of his employment by the Company. See
"Item 12 - Settlements with Prior Management" as to the cancellation of this
employment agreement and the waiver by Mr. Winder of all rights thereunder.
On August 18, 1997, the Company filed a current report on Form 8-K
reporting a change as of August 11, 1997 in its certifying accountant from the
firm of Stetz, Belgiovine CPAs, P.C. to Wiss & Company, LLP, CPAs and reporting
a change in its fiscal year-end from December 31 to March 31. As a result, the
three month period ended March 31, 1997 is a transition period and the Company's
most recently completed fiscal year is the twelve-month period ended March 31,
1998. The following table sets forth certain information concerning the
compensation paid or accrued during the three-month transition period ended
March 31, 1997 and the most recently completed fiscal year ended March 31, 1998
by the Company to its Chief Executive Officer as well as to any other executive
officer of the Company or a subsidiary who earned at least $100,000 during such
twelve-month period or who is named in the earlier table.
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
(1998)
Annual Compensation Long-term
-------------------- Awards Compensation Payouts
---------- --------------------
Restricted
Name And Other Annual Stock Options/ Ltip All Other
Principal Position Period Salary Bonus Compensation Award(s) Sars Payouts Compensation
- ------------------ ------ ----- ------------ -------- ---- ------- ------------
(1) ($) ($) ($)
--- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William S. Taylor* (a) $69,806 $0 $ 5,985 -- 176,923shs(2) -- --
President, CEO and (b) $54,327 $0 $ 2,993 -- -- -- --
Chairman of the Board
(until 10/8/97)(7)
Joseph A. Rosio (a) $60,256 $0 $ 1,393 500,000shs(3)
President, CEO and (b) -- -- -- -- --
Chairman of the Board
(commencing 10/8/97)(8)
Les Winder (a) $62,671 $0 $11,723 -- 103,846shs(4) -- --
Executive Vice President (b) $38,611 $0 $ 5,862 -- -- -- --
and Treasurer, Director(9)
Brenda Taylor* (a) $33,107 $0 $ 5,200 -- 50,000shs(5) -- --
Secretary and Director (b) $24,279 $0 $ 2,600 -- -- -- --
(until 10/8/97(
Robert DePalo (a) $63,375 $0 -0- -- 422,308shs(6) -- --
Director, Finance (b) $24,433 $0 -0- -- -- -- --
(until 3/24/98)(10)
</TABLE>
- ---------
(a) Twelve months ended March 31, 1998
(b) Three months ended March 31, 1997
*William S. Taylor is Brenda Taylor's son.
(1) William S. Taylor, Les Winder and Brenda Taylor were also entitled to
certain fringe benefits in connection with their employment including an
automobile allowance and medical insurance benefits. The amount listed in this
column reflects the aggregate value of such fringe benefits for the applicable
period.
(2) These options, exercisable to purchase 176,923 shares of Common
Stock at $1.30 per share, were granted to William S. Taylor pursuant to the
unanimous written consent of the Board of Directors dated September 29, 1997 for
various items of consideration including cancellation of his employment
agreement. Mr. Taylor exercised the options and paid the exercise price by
releasing his claims to certain credits including amounts due him on the
Company's books. The shares were issued to him in October 1997. The Company
issued W-2s to Mr. Taylor and to the IRS for 1997 indicating in addition to any
other compensation paid to Mr. Taylor by the Company in 1997, additional
compensation of $183,357 equal to the difference between the number of shares
(176,923) multiplied by the mean between the closing bid and asked prices for
the Company's Common Stock in the over-the-counter market on October 8, 1997 of
$1.65625 per share or $293,029 on the one hand, and the net amount of the loans
and advances owed by the Company to Mr. Taylor as indicated by the Company's
books of account, plus a credit for rescission of his prior PCN stock purchase,
plus legal fees paid by Mr. Taylor on behalf of
<PAGE>
the Company, aggregating $109,672, on the other. Such additional compensation is
not reflected in the table. See "Item 12 - Settlements with Prior Management."
(3) These options granted to Mr. Rosio by the Board of Directors on October
30, 1997, include incentive stock options exercisable to purchase 200,000 shares
of Common Stock at $1.453125 per share and non-qualified stock options
exercisable to purchase 300,000 shares at exercise prices ranging from $1.453125
to $2.00 per share. All of these options were granted pursuant to the October
30, 1997 Stock Option Plan and were subject to stockholder approval of the Plan,
which approval was obtained on May 28, 1998.
(4) These options, exercisable to purchase 103,846 shares of Common Stock
at $1.30 per share, were granted to Les Winder pursuant to the unanimous written
consent of the Board of Directors dated September 29, 1997 for various items of
consideration including cancellation of his employment agreement. Mr. Winder
exercised the options and paid the exercise price by releasing his claims to
certain net credits owed him by the Company. The shares were issued to him in
October 1997. The Company issued W-2s to Mr. Winder and to the IRS for 1997
indicating in addition to any other compensation paid to Mr. Winder by the
Company in 1997, additional compensation of $157,801 equal to the difference
between the number of shares (103,846) multiplied by the mean between the
closing bid and asked prices for the Company's Common Stock in the
over-the-counter market on October 8, 1997 of $1.65625 per share or $171,995 on
the one hand, and a credit for rescission of his prior PCN stock purchase plus
legal fees paid by Mr. Winder on behalf of the Company aggregating $14,194 after
offset of the $11,806 net amount of the loans and advances owed by Mr. Winder to
the Company as indicated by the Company's books of account, on the other. Such
additional compensation is not reflected in the table. See "Item 12 -
Settlements with Prior Management."
(5) These options, exercisable to purchase 50,000 shares of Common Stock at
$1.30 per share, were granted to Brenda Taylor pursuant to the unanimous written
consent of the Board of Directors dated September 29, 1997 for various items of
consideration. Ms. Taylor exercised the options and paid the exercise price by
releasing her claims to certain credits including amounts due her on the
Company's books. The shares were issued to her in October 1997. The Company
issued W-2s to Ms. Taylor and to the IRS for 1997 indicating in addition to any
other compensation paid to Ms. Taylor by the Company in 1997, additional
compensation of $17,813 equal to the difference between the number of shares
(50,000) multiplied by the mean between the closing bid and asked prices for the
Company's Common Stock in the over-the-counter market on October 8, 1997 of
$1.65625 per share or $82,813 on the one hand, and the net amount of the loans
and advances owed by the Company to Ms. Taylor as indicated by the Company's
books of account, plus a credit for rescission of her prior PCN stock purchase
aggregating $65,000, on the other. Such additional compensation is not reflected
in the table. See "Item 12 - Settlements with Prior Management."
(6) Includes options exercisable to purchase 80,000 shares of Common Stock
at $2.00 per share and options exercisable to purchase 192,308 shares of Common
Stock at $1.30 per share. These options were granted to Robert DePalo pursuant
to the unanimous written consent of the Board of Directors dated September 29,
1997 for various items of consideration including cancellation of his employment
agreement. Mr. DePalo exercised the options, exercisable at $1.30 per share, and
paid the exercise price by releasing certain credits including amounts due him
on the Company's books. The shares were issued to him in October 1997. The
Company issued W-2s to Mr. DePalo and to the IRS for 1997 indicating in addition
to any other compensation paid to Mr. DePalo by the Company in 1997, additional
compensation of $78,764 equal to the difference between the number of shares
purchased by him on exercise (192,308), multiplied by the mean between the
closing bid and asked prices for the Company's Common Stock in the
over-the-counter market on October 8, 1997 of $1.65625 per share or $318,510 on
the one hand, and the net amount of the loans and advances owed by the Company
to Mr. DePalo as indicated by the Company's books of account, plus a credit for
rescission of his prior PCN stock purchase, plus legal fees paid by Mr. DePalo
on behalf of the Company, aggregating $239,746, on the other. Such additional
compensation is not reflected in the table. Also includes five-year options
granted to Mr. DePalo by the Board of Directors pursuant to a consulting
agreement executed on February 5, 1998, exercisable to purchase 150,000 shares
of Common Stock at $2.25 per share. These options were granted pursuant to the
October 30, 1997 Stock Option Plan and were subject to stockholder approval of
the Plan, which approval was obtained on May 28, 1998. See "Item 12 -
Settlements with Prior Management."
(7) See footnote (7) to the earlier Summary Compensation Table herein as to
the terms of William S. Taylor's employment agreement and "Item 12 - Settlements
with Prior Management" as to the cancellation of this employment agreement and
the waiver by Mr. Taylor of all rights thereunder.
<PAGE>
(8) See "Current Employment and Consulting Agreements" as to the terms of
Mr. Rosio's employment agreement with the Company effective November 1, 1997.
(9) See footnote (8) to the earlier Summary Compensation Table herein as to
the terms of Mr. Winder's employment agreement and "Item 12 - Settlements with
Prior Management" as to the cancellation of this employment agreement and the
waiver by Mr. Winder of all rights thereunder.
(10) Effective May 28, 1997, the Company entered into an employment
agreement with Mr. DePalo for a term of five years. The agreement provided for
Mr. DePalo to provide a minimum of 30 hours per month of financial, investment
banking, strategic planning and related services to the Company for an initial
annual base salary of $130,000 per year increasing by 10% in each succeeding
year as well as a 10% finder's fee with respect to any merger or acquisition
transaction involving the Company which Mr. DePalo procured. See "Item 12 -
Settlements with Prior Management" as to the cancellation of this employment
agreement and the waiver by Mr. DePalo of all rights thereunder, and "Current
Employment and Consulting Agreements" as to the terms of Mr. DePalo's consulting
agreement with the Company effective February 1, 1998.
CURRENT EMPLOYMENT AND CONSULTING AGREEMENTS
Effective November 1, 1997, the Company agreed to employ Joseph A. Rosio on a
full-time basis as president and chief executive officer. The employment
agreement expires on March 31, 2001 and provides for annual compensation of
$125,000 the first year, increasing by $25,000 in each successive year with a
salary for the final five months of $72,917, provided that his salary will be
increased to $200,000 with respect to any fiscal year in which the Company
realizes at least $2 million of pre-tax income. Pursuant to the agreement, Mr.
Rosio is also entitled to an annual bonus equal to 5% of the first $10 million
of the Company's pre-tax income and 7% of any pre-tax income in excess of $10
million (in each case excluding extraordinary items). Pursuant to the agreement,
Mr. Rosio was also granted options exercisable to purchase 500,000 shares of the
Company's Common Stock pursuant to the October 30, 1997 Stock Option Plan,
subject to stockholder approval of the Plan, which approval was obtained on May
28, 1998. See "Stock Options."
Effective January 1, 1998, the Company agreed to employ Christopher J. Garcia on
a full-time basis as treasurer and chief financial officer. The agreement is for
a one-year term and provides for an annual salary of $85,000 plus a bonus at the
discretion of the Board of Directors. In addition, Mr. Garcia received a $15,000
signing bonus. Pursuant to the agreement, Mr. Garcia was granted options
exercisable to purchase 100,000 shares of the Company's Common Stock pursuant to
the October 30, 1997 Stock Option Plan, subject to stockholder approval of the
Plan, which approval was obtained on May 28, 1998.
Effective February 1, 1998, the Company entered into a two-year consulting
agreement with Robert DePalo. The agreement provides for Mr. DePalo to provide a
minimum of 30 hours per month of financial consulting and investment banking
services to the Company for an annual consulting fee of $75,000. Pursuant to the
agreement, Mr. DePalo is also entitled to a 6% finder's fee in connection with
any acquisition by the Company of an entity procured by Mr. DePalo and a 10%
finder's fee in connection with any transaction procured by Mr. DePalo in which
the Company is acquired, provided in each case that the transaction is completed
no later than one year after the consulting agreement expires. Pursuant to the
consulting agreement, the Company has agreed to pay Mr. DePalo's cellular
telephone bills of up to $1,000 per month for the two-year term and to provide
him with a private office for such period. See "Item 12 - Settlements with Prior
Management."
<PAGE>
STOCK OPTIONS
The Company has a Stock Option Plan adopted in September 1994 and
subsequently approved by shareholders (the "1994 Plan") permitting the granting
of stock options exercisable to purchase an aggregate 25,000 shares of Common
Stock to employees, directors and consultants. Pursuant to the 1994 Plan,
options to purchase 1,667 shares at an exercise price of $45.60 per share were
issued to a director, Mal Gurian on July 10, 1995. On June 3, 1996, options to
purchase 833 shares at an exercise price of $21.60 per share were issued to
another director, Ira Tabankin, and options to purchase an additional 4,166
shares at an exercise price of $21.60 per share were issued to Mr. Gurian. Mr.
Tabankin's options have since terminated and Mr. Gurian agreed to the
cancellation of his options at the time of the October 30, 1997 grant to him of
options exercisable to purchase 45,000 shares pursuant to the October 1997 Plan.
No other options were granted pursuant to the 1994 Plan.
Pursuant to the unanimous written consent of the Board of Directors on September
29, 1997, options exercisable to purchase the following number of shares of
Common Stock at $1.30 per share were granted to the following officers and
directors:
William S. Taylor 176,923 shares
Les Winder 103,846 shares
Brenda Taylor 50,000 shares
Robert DePalo 192,308 shares
All of such options were exercised. See "Item 12 - Settlements with Prior
Management" as to the issuance by the Company to each of such individuals of IRS
Form W-2 indicating in addition to any other compensation paid to each by the
Company in 1997, additional compensation in an amount equal to the difference
between the number of shares issued to the individual multiplied by $1.65625
(the mean between the per share closing bid and asked prices for the Common
Stock on October 8, 1997) and certain credits including amounts due on the
Company's books. Additional options granted to William S. Taylor, Les Winder,
Brenda Taylor and Robert DePalo on September 29, 1997, exercisable to purchase
an aggregate 290,000 shares at $2.00 per share and an aggregate 270,000 shares
at $4.00 per share were cancelled prior to issuance. Mr. DePalo was also granted
options on September 29, 1997 exercisable to purchase 90,000 shares at $2.00 per
share which options were subsequently reduced to permit the purchase of 80,000
shares at $2.00. These options remain outstanding.
On October 30, 1997, the Board of Directors adopted the October 30, 1997 Stock
Option Plan (the "October 1997 Plan") reserving a maximum of 1,000,000 shares of
Common Stock, $.60 par value for options which could be granted under the
October 1997 Plan. The October 1997 Plan and any options granted pursuant to
such Plan were subject to stockholder approval of the adoption of the Plan,
which approval was obtained on May 28, 1998.
On October 30, 1997, the Board of Directors granted incentive stock options
pursuant to the October 1997 Plan, exercisable to purchase 200,000 shares of
Common Stock to Joseph A. Rosio at an exercise price of $1.453125 per share
equal to the mean between the closing bid price and the closing asked price for
such Common Stock in the over-the-counter market on said date. On the same date,
the Board of Directors granted non-qualified options pursuant to the October
1997 Plan; (i) to Mr. Rosio, exercisable to purchase an additional 300,000
shares of Common Stock at prices ranging from $1.453125 to $2.00 per share; (ii)
to John Cassella, exercisable to purchase 100,000 shares of Common Stock at
$1.453125 per share; and (iii) to Mal Gurian, exercisable to purchase 45,000
shares of Common Stock at $1.453125 per share.
Effective January 2, 1998, the Board of Directors granted incentive stock
options pursuant to the October 1997 Plan to Christopher J. Garcia, exercisable
to purchase 100,000 shares of Common Stock at $2.109375 per share, the mean
between the closing bid and asked prices for the Common Stock in the
over-the-counter market on said date. On February 4, 1998, the Board of
Directors granted incentive stock options pursuant to the October 1997 Plan to a
non-officer employee, exercisable to purchase 50,000 shares of Common Stock at
$2.296875 per share and non-qualified options to Mr. DePalo, exercisable to
<PAGE>
purchase 150,000 shares of Common Stock at $2.25 per share. The mean between the
closing bid and asked prices for the Common Stock in the over-the-counter market
on February 4, 1998 was $2.296875.
The above described options, granted pursuant to the October 1997 Plan and
exercisable to purchase an aggregate 945,000 shares of Common Stock, were
subject to stockholder approval of the adoption of the October 1997 Plan, which
approval was obtained on May 28, 1998.
No options were granted to any of the Company's executive officers in 1996. The
following table illustrates information concerning stock option grants made
during the 12 months ended March 31, 1998 to each current and former officer
named in the "Summary Compensation Table."
OPTION GRANTS IN THE TWELVE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
Percent of Total
Number of Shares Options Granted to
Of Common Stock Officers, Directors,
Underlying Options And Employees in Market Price
Name Granted The Period Exercise Price On Date Of Grant Expiration Date
- ---- ------- ---------- -------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
William S. Taylor 176,923(c) 11.43% $ .62(b) $1.65625 09/29/02
Joseph A. Rosio 300,000(a) 19.38% $1.453125 $1.453125 10/30/07
100,000(a) 6.45% $1.75 $1.453125 10/30/07
100,000(a) 6.45% $2.00 $1.453125 10/30/07
Les Winder 103,846(c) 6.71% $ .14(b) $1.65625 09/29/02
Brenda Taylor 50,000(c) 3.23% $1.30(b) $1.65625 09/29/02
Robert DePalo 80,000(c) 5.17% $2.00 $1.65625 09/29/02
192,308(c) 12.46% $1.25(b) $1.65625 09/29/02
150,000(a) 9.69% $2.25 $2.296875 02/04/03
</TABLE>
(a) Issued pursuant to the October 1997 Plan and approved by the shareholders
on May 28, 1998.
(b) Based upon the amount of credits recognized by the Company in connection
with the exercise of the options divided by the number of shares purchased
(See Item 12-"Settlements with Prior Management").
(c) Issued pursuant to the unanimous written consent of the Board on September
29, 1997.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES DURING TWELVE MONTHS ENDED MARCH 31, 1998
AND VALUE OF UNEXERCISED OPTIONS AT MARCH 31, 1998
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Acquired Options at March 31, 1998 at March 31, 1998 (2)
Name On Exercise Value Realized(1) Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ----------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William S. Taylor 176,923shs $183,357 -0- -0- -0- -0-
Joseph A. Rosio -0- -0- 368,817shs 131,183shs -0- -0-
Les Winder 103,846shs $157,801 -0- -0- -0- -0-
Brenda Taylor 50,000shs $ 17,813 -0- -0- -0- -0-
Robert DePalo 192,308shs $ 78,764 230,000shs -0- -0- -0-
</TABLE>
(1) Based on the market value of the Common Stock on October 8, 1998 ($1.65625
per share) minus certain credits recognized by the Company.
(2) Based on the market value of the Common Stock on March 31, 1998 minus the
exercise price.
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of the close of business on June 9, 1998, the
number of shares of its its Common Stock owned beneficially to the knowledge of
the Company by each beneficial owner of more than 5% of the outstanding Common
Stock, by each director and by all officers and directors of the Company as a
group. The percentages have been calculated on the basis of treating as
outstanding for purposes of computing the percentage ownership of a particular
individual, all shares of Common Stock outstanding as of such date and all
shares of Common Stock issuable to such individual in the event of exercise of
outstanding options owned by such holder at such date which are exercisable
within 60 days of such date. Except as indicated in the footnote to the table,
each individual is the sole beneficial owner with sole voting rights and
investment power with respect to the shares set forth opposite his name (except
for shares issuable upon exercise of his options, none of which have been
exercised).
NAME AND ADDRESS AMOUNT AND NATURE OF
OF BENEFICIAL OWNER BENEFICIALLY OWNERSHIP PERCENT OF CLASS
- ------------------- ---------------------- ----------------
Directors*
Joseph A. Rosio 403,817shs(1) 4.5%
John P. Cassella 33,334shs(2) --%(5)
Christopher J. Garcia -0- (3) --
Mal Gurian 45,000shs(4) --%(5)
All executive officers and
directors as a group
(four persons) 482,151shs(1)(2)(3)(4) 5.4%
- ----------
*The address of each executive officer and director is c/o the Company, 425
Broad Hollow Road, Melville, New York 11747.
(1) Includes 300,000 shares of Common Stock purchasable upon exercise of
non-qualified options at exercise prices ranging from $1.453125 to $2.00 per
share and 68,817 shares purchasable upon exercise of incentive stock options at
an exercise price of $1.453125 per share. Does not include an additional
aggregate 131,183 shares purchasable upon exercise of incentive stock options at
an exercise price of $1.453125 per share, which options are first exercisable in
1999 (68,817 shares) and in 2000 (62,366 shares). All of these options were
granted pursuant to the October 30, 1997 Stock Option Plan and were subject to
stockholder approval of the Plan, which approval was obtained on May 28, 1998.
See "Stock Options."
(2) Includes 33,334 shares of Common Stock purchasable upon exercise of
non-qualified options at an exercise price of $1.453125 per share. Does not
include 33,333 shares purchasable commencing November 1, 1998, or an additional
33,333 shares purchasable commencing November 1, 1999 upon exercise of
non-qualified options at an exercise price of $1.453125 per share. All of these
options were granted pursuant to the October 30, 1997 Stock Option Plan and were
subject to stockholder approval of the Plan, which approval was obtained on May
28, 1998.
(3) Mr. Garcia has been granted incentive stock options exercisable to
purchase an aggregate 100,000 shares of Common Stock at an exercise price of
$2.109375 per share. These options are first exercisable in 1999 (with respect
to 47,407 shares), in 2000 (with respect to an additional 47,407 shares) and in
2001 (with respect to the balance). They were granted pursuant to the October
30, 1997 Stock Option Plan and were subject to stockholder approval of the Plan,
which approval was obtained on May 28, 1998.
(4) These 45,000 shares of Common Stock are purchasable upon exercise of
non-qualified options at an exercise price of $1.453125 per share. These options
were granted pursuant to the October 30, 1997 Stock Option Plan and were subject
to stockholder approval of the Plan, which approval was obtained on May 28,
1998. Less than 1%.
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
William S. Taylor, Les Winder, Robert DePalo and Brenda Taylor provided
personal guarantees of certain Company bank loans in the aggregate amount of
$1,150,000 incurred in the fourth quarter of calendar year 1995, and posted
collateral in connection with such loans in order to enable the Company to fund
the bid deposits required to render it an eligible bidder for the FCC's PCS "C"
Block licenses auction conducted in December 1995 and in the first quarter of
calendar 1996. In order to compensate the individuals for their guarantees and
posting of collateral, on June 3, 1997, the Board of Directors authorized the
issuance to them of Class A Warrants exercisable to purchase an aggregate
191,667 shares of Common Stock at an exercise price of $60 per share (reduced to
$27 per share on December 24, 1996 and further reduced to $2.25 per share
effective September 16, 1997) and also granted each the right to purchase up to
six (6) shares representing 6% of the capital stock of the Company's PCN
subsidiary for $1,000 per share. Two of the six PCN shares allocated to Mr.
DePalo were purchased by his wife. PCN was the recipient of six PCS licenses
awarded by the FCC on May 8, 1996 based on the Company's bid. The grant of the
Class A Warrants and the purchase and delivery of the PCN stock was conditioned
on the grant to the Company of the PCS licenses and the delivery and acceptance
of the Company's FCC Notes and related Security Agreements by the FCC. See
"Settlements with Prior Management" as to agreements pursuant to which Messrs.
William S. Taylor, Winder and DePalo and Brenda Taylor waived any rights to the
Class A Warrants and rescinded their purchases of PCN stock, and pursuant to
which the Company repurchased Mrs. DePalo's shares of PCN stock.
During the fourth quarter of calendar 1996, the Company borrowed $180,000
from Robert DePalo repayable on demand with interest at the rate of 10% per
annum. The Company borrowed the funds for working capital purposes. At March 31,
1997, the loan balance had been reduced by approximately $100,000 through
repayments to Mr. DePalo. In the quarter ended September 30, 1997, the Company
borrowed an additional $100,000 from Mr. DePalo on similar terms for working
capital purposes. During the fourth quarter of calendar year 1997, Mr. DePalo
loaned an additional $105,000 to the Company for working capital purposes which
amount was repaid by the Company to Mr. DePalo in December 1997 out of the net
proceeds of its December 1997 Regulation S Private Offering. At December 31,
1997, the net amount of the loans and advances made by Mr. DePalo to the Company
and payments made by him on behalf of the Company (excluding legal fees paid by
him on behalf of the Company) totalled approximately $200,000. See "Settlements
with Prior Management" as to the Company's settlement of these amounts with Mr.
DePalo.
In March 1996, the Company borrowed $134,000 from an unrelated third-party,
Technics in Design & Manufacturing, Inc. ("TDMI") for working capital purposes
and issued its promissory note in consideration for the loan. The loan was
payable on March 5, 1997 with interest at an annual rate of 10%. In July 1996,
the Company repaid $25,000 of the loan principal thereby reducing the balance to
$109,000. Although the Company has an assignment in its files dated May 5, 1996
pursuant to which TDMI purportedly assigned the note to Mr. DePalo's wife, Mr.
DePalo has advised that it was not until October 1996 at a time when TDMI was
requesting early payment of the note, that Mrs. DePalo accommodated TDMI by
purchasing the note from TDMI for $109,000. The Company paid Mrs. DePalo the
$109,000 balance of the note together with accrued interest in January 1997 out
of the net proceeds of its December 1996 private placement.
SETTLEMENTS WITH PRIOR MANAGEMENT
In January 1998, the Company entered into settlement agreements with three
former officer/directors, William S. Taylor, his mother Brenda Taylor and Les
Winder. Pursuant to the agreements, each of the three individuals agreed to
cancel his or her employment agreement or employment arrangement and proposed
consulting agreement with the Company, any rights to warrants and/or options
exercisable to purchase shares of the Company's Common Stock (excluding warrants
sold by the individual prior to August 31, 1997 and the options hereinafter
described) and any rights to shares of the Company's Series B Preferred Stock.
The issuance of the Series B Preferred Stock had been approved by the Company's
stockholders at the Annual Meeting of Shareholders held on October 17, 1996 but
the shares were never issued and the notes to be given in payment for the shares
were never delivered to the Company. Each individual also agreed to rescind the
transaction by which he or she had purchased 6% of the stock of the Company's
PCN subsidiary for $6,000. In consideration therefor, the Company agreed, unless
required to do so by court order, to take no action to challenge the issuance to
each individual of shares of its Common Stock issued to such individual (176,923
shares to William S. Taylor, 50,000 shares to Brenda Taylor and 103,846 shares
to Les Winder) pursuant to options granted to each such individual by the
September 29, 1997 unanimous written consent of the Company's Board of
Directors. The options, exercisable at $1.30 per share, were exercised and the
shares were issued to each of the three former officer/directors in October
1997.
<PAGE>
The Company issued W-2s to William S. Taylor and to the IRS for 1997
indicating in addition to any other compensation paid to Mr. Taylor by the
Company in 1997, additional compensation in an amount equal to the difference
between the 176,923 shares issued to him multiplied by the mean between the
closing bid and asked prices for the Common Stock in the over-the-counter market
on October 8, 1997 of $1.65625 per share or $293,029 on the one hand, and the
net amount of the loans and advances owed by the Company to Mr. Taylor as
indicated by the Company's books of account ($63,671), plus a $6,000 credit for
rescission of his prior purchase of PCN stock, plus $40,000 of legal fees paid
by Mr. Taylor on behalf of the Company (a total of $109,672), on the other. The
Company also issued W-2s to Les Winder and to the IRS for 1997 indicating in
addition to any other compensation paid to Mr. Winder by the Company in 1997,
additional compensation in an amount equal to the 103,846 shares issued to him
multiplied by $1.65625 per share or $171,995 on the one hand, and the $20,000 of
legal fees paid by Mr. Winder on behalf of the Company, plus a $6,000 credit for
rescission of his prior purchase of PCN stock, less the $11,806 net amount of
the loans and advances owed by Mr. Winder to the Company as indicated by the
Company's books of account (a total of $14,194), on the other. Similarly, the
Company issued W-2s to Brenda Taylor and to the IRS for 1997 indicating in
addition to any other compensation paid to her by the Company in 1997,
additional compensation in an amount equal to the 50,000 shares issued to her
multiplied by $1.65625 per share or $82,813 on the one hand, and the net amount
of the loans and advances owed by the Company to Ms. Taylor as indicated by the
Company's books of account ($59,000), plus a $6,000 credit for rescission of her
prior purchase of PCN stock (a total of $65,000), on the other. In connection
with these settlement agreements, William S. Taylor and Brenda Taylor have
advised the Company that it is their position that certain General Release,
Indemnity and Hold Harmless Provisions adopted by the directors on September 29,
1997 when William S. Taylor, Brenda Taylor and Les Winder constituted three of
the six members of the Board of Directors, indemnifying them from any claims
asserted in connection with any action taken for or their role with the Company
are in full force. It is present management's position that such releases and
hold harmless provisions are not in effect.
On February 5, 1998, the Company entered into settlement agreements with a
then director, Robert DePalo and his wife which resulted in the rescission by
Mr. DePalo of his previous purchase for $4,000 of 4% of the stock of the
Company's PCN subsidiary and the purchase by the Company from Ms. DePalo for
$67,000 of 2% of the stock of the PCN subsidiary which she had purchased for
$2,000 in August 1996. As a result of the agreements with William S. Taylor,
Brenda Taylor, Mr. Winder and Mr and Mrs. DePalo, PCN is now 100% owned by the
Company.
Pursuant to his February 5, 1998 agreement with the Company, Robert DePalo
agreed to cancel his prior employment agreement and a prior proposed consulting
agreement with the Company, any rights to warrants exercisable to purchase
shares of the Company's Common Stock (excluding warrants sold by him prior to
August 31, 1997) and any rights to shares of the Company's Series B Preferred
Stock. He also agreed to waive any and all options he held exercisable to
purchase shares of the Company's Common Stock excluding (a) options exercisable
at $1.30 per share granted to him pursuant to the September 29, 1997 unanimous
written consent of the Board of Directors and exercised by him to purchase
192,308 shares of the Company's Common Stock, (b) five-year options previously
granted to him and exercisable to purchase 80,000 shares of the Company's Common
Stock at $2.00 per share, and (c) five-year options to purchase 150,000 shares
of the Company's Common Stock at $2.25 per share pursuant to a consulting
agreement with the Company executed on February 5, 1998.
<PAGE>
Pursuant to the settlement agreement with Mr. DePalo, the Company issued a
W-2 to him and to the IRS for 1997 indicating in addition to any other
compensation paid to him by the Company in 1997, additional compensation in an
amount equal to the difference between the 192,308 shares issued to him
multiplied by the mean between the closing bid and asked prices for the
Company's Common Stock in the over-the-counter market on October 8, 1997 of
$1.65625 per share or $318,510 on the one hand, and the net amount of the loans
and advances owed by the Company to Mr. DePalo as indicated by the Company's
books of account ($198,746), plus a $4,000 credit for rescission of his prior
purchase of the PCN stock, plus $37,000 of legal fees paid by Mr. DePalo on
behalf of the Company (a total of $239,746), on the other.
In consideration for Mr. DePalo's agreements and waivers, the Company and
Mr. DePalo executed a two-year consulting agreement previously described
pursuant to which Mr. DePalo was retained by the Company as a part-time
consultant for an annual consulting fee of $75,000 and was granted five-year
options pursuant to the Company's October 30, 1997 Stock Option Plan,
exercisable to purchase 150,000 shares of the Company's Common Stock at $2.25
per share but subject to stockholder approval of the Plan, which approval was
obtained on May 28, 1998. See "Current Employment and Consulting Agreements."
On March 24, 1998, Mr. DePalo resigned as a director of the Company. The
resignation does not affect his options or his consulting agreement.
PARENT OF THE COMPANY
As chairman of the board, president, chief executive officer and the
beneficial owner of 403,817 shares of its Common Stock, Joseph A. Rosio may be
deemed the parent and controlling person of the Company.
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
The Company intends to file the exhibits required by Item 601 of Regulation S-B
within 120 days after the end of its March 31, 1998 fiscal year.
(B) REPORTS ON FORM 8-K
During the last quarter of the fiscal year ended March 31, 1998, the Company
filed one report on Form 8-K for January 20, 1998 listing in Item 9, the
consummation of the sale by the Company in a Regulation S private offering of 45
shares of Series C Convertible Preferred Stock for $4,500,000.
<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 on
its behalf by the undersigned, thereunto duly authorized.
(Registrant) Northeast Digital Networks, Inc.
(Formerly Electronics Communications Corp.
By /s/ Joseph A. Rosio
------------------- Joseph A. Rosio, President, Principal
Joseph A. Rosio, Director Executive Officer
Date July 14, 1998
By /s/ Christopher J. Garcia
--------------------------- Christopher J. Garcia, Treasurer,
Christopher J. Garcia Principal Financial and Accounting
Officer
Date July 14, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
By /s/ Joseph A. Rosio
-------------------------
Joseph A. Rosio, Director
Date July 14, 1998
By /s/ Christopher J. Garcia
-------------------------------
Christopher J. Garcia
Date July 14, 1998
By /s/ John P. Cassella
--------------------------
John P. Cassella, Director
Date July 14, 1998
